Tips to Get the Best Interest Rate When Consolidating Your Debt

If you're juggling multiple debts, you may be having a hard time keeping up with your payments. Debt consolidation could be a good way to streamline your bills and make your life easier. Plus, it could save you money—especially if you manage to score a great interest rate on your debt consolidation loan. Here’s how to pull that off. 

What Is Debt Consolidation?

With debt consolidation, you roll a bunch of different debts into a single monthly payment. This allows you to pay one bill each month instead of juggling multiple due dates. It could also, in some cases, reduce the amount of interest you're paying on your debt.

How to Get the Best Interest Rate When Consolidating Your Debt

Consolidating debt won’t reduce the total amount you owe. If you want to reduce your debt, you’ll need to look at debt settlement programs or bankruptcy. But you could still save money on your debt by snagging a lower interest rate on a consolidation loan compared to what you’re paying now. Here are some tips to get the best interest rate when consolidating your debt.

Boost your credit score

Your credit score is important to lenders because it tells them how likely you are to repay your debt. To build a strong credit standing, you need a history of on-time payments. If a lender sees that your credit score is in great shape, it may reward you in the form of a lower interest rate on a debt consolidation loan.

Experian, one of the three credit bureaus, says a credit score of 740 to 799 is very good, and a credit score between 800 and 850 is excellent. If you can get your credit score into those ranges, you may qualify for a more competitive interest rate on a debt consolidation loan.

Here are several different ways you can boost your credit score:

• Pay all bills on time

• Keep your credit utilization as close to zero as possible

• Keep long-standing credit card accounts open

• Check your credit report for mistakes and dispute errors that you find

Explore different borrowing options 

You have different options for consolidating debt, and the one you choose could help determine what interest rate you get. 

If you own a home, you may be able to borrow against it. You can do this in a few different ways:

• A home equity loan lets you borrow a lump sum that you pay back in installments at a fixed interest rate. You need to have sufficient home equity. Equity is your home’s market value minus the amount you still owe on the mortgage.

• A home equity line of credit, or HELOC, gives you access to a line of credit you can tap over an extended period of time. HELOCs commonly have variable interest rates, but there are fixed-rate HELOCs available. HELOCs also require that you have enough equity to borrow against.

• A cash-out refinance lets you swap your existing mortgage for a new one whose balance is higher than your current balance. You could use the excess funds to pay off your debts and then make a single payment toward your new mortgage each month.

You can also consider a personal loan for debt consolidation. Unlike the options above, a personal loan is unsecured, which means it's not tied to a specific asset, like your home. Because of this, it may be a more expensive option than a home equity loan, HELOC, or cash-out refinance.

Another option is to consolidate your debt by doing a balance transfer onto a credit card with a 0% introductory rate. But this can be risky. 

Balance transfer cards typically let you benefit from 0% interest for a period of time (commonly 12 to 18 months). Once that introductory period ends, you could end up with an interest rate that’s just as high, or higher, than the one you started out with. Only choose a balance transfer if you’re very confident you’ll have your debt paid off by the time your introductory period ends.

Another risk to consider is accumulating new debt after you consolidate. In other words, if you use a loan or balance transfer to completely pay off several credit cards, and then you put new debt on those credit cards, you could end up in worse financial shape than before. 

Choose your loan term and amount strategically

The amount of money you borrow could have an impact on the interest rate you qualify for. If you’re taking out a smaller debt consolidation loan, you might qualify for a lower interest rate than you would with a larger loan, since a smaller loan represents less risk for your lender.

The length of your repayment period could also impact your debt consolidation loan’s interest rate. Some loans offer lower rates for shorter loans. A shorter repayment term could mean larger monthly payments. Make sure you can afford any payments you sign up for, since falling behind could damage your credit score and set you back on the path to paying off your debt for good. 

Shop around

Whether you decide to consolidate your debt into a personal loan, home equity loan, or another option, it’s a good idea to shop around with different lenders. You can start by applying with a lender you already have a relationship with. For example, if the bank where you have your savings account offers personal loans, there’s no reason not to apply there. But it’s always a good idea to get quotes from multiple lenders so you can compare your options.

Do your rate shopping fairly quickly—ideally, within 14 days. Typically, when you apply for a loan, a hard inquiry is done on your credit report. Each hard inquiry could result in a minor credit score drop. But if you apply for the same kind of loan from multiple lenders within 14 days, all of the inquiries will count as just one. 

Debt Consolidation Can Help You Pay Off What You Owe

Consolidating your debt could make it easier and less complicated to pay off. With the right strategy, you may be able to snag a competitive interest rate that saves you money on the road to becoming debt-free.