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How to Get a Low Interest Rate on a Debt Consolidation Loan

Maximize the benefits of debt consolidation with a lower interest rate.

Author Justin Cupler
Contributing Writer at Tally
June 28, 2021

Credit card debt can pile up quickly, leaving you wondering how to manage it all. Luckily, you don’t have to do it all on your own — there are financial tools that can help. One such tool is debt consolidation when you take out one loan to pay off multiple debts. 

A debt consolidation loan not only rolls all those payments into one, making repayment easier to manage, it also gives you a fixed term to pay off credit card debt, and it often comes with a lower interest rate than a credit card

To maximize the benefits of this financial tool, you’ll want to get the best debt consolidation loan interest rate because a lower interest rate means the loan will cost you less throughout its term. Below, we’ll cover debt consolidation loan interest rates and how to lower yours. 

Debt Consolidation Loan Interest Rates

Debt consolidation interest rates vary based on multiple factors, but most will be tied to the federal reserve rate, which is the interest rate banks charge each other for overnight loans. 

Lenders then add a set number of percentage points to the federal reserve rate to develop their base interest rate, which will be the bank’s interest rate to borrowers with excellent credit. The additional percentage points are called the margin. 

Lenders then create credit tiers, or buckets, for borrowers with less-than-excellent credit from that base interest rate. Each lender will have different margins for each credit tier or bucket, leading to the wide range of rates you may see between lenders

As of June 17, 2021, the average debt consolidation loan interest rates for the different credit tiers, according to NerdWallet, are as follows: 

  • 720-850 credit score: 11.8%
  • 690-719 credit score: 17.4%
  • 630-689 credit score: 23.4%
  • 629 and below credit score: 28.7%

How to Get Low Debt Consolidation Interest Rates

Debt consolidation loan interest rates: A couple writes a check while meeting with a lender

Of course, getting the lowest debt consolidation loan interest rate is the goal. The lower the interest rate, the less it will cost you to pay off this debt. However, with credit card interest rates sometimes exceeding the 24% mark, almost any debt consolidation loan could save you money when you’re consolidating credit card debt. 

Here are some methods to try to get the lowest possible debt consolidation loan interest rate

Building an excellent credit score

An excellent credit score is the first step toward getting the lowest possible debt consolidation interest rate. Unfortunately, building a great credit score is a long-term process that may take months or even years to complete. 

But if your credit score is teetering just below the next credit tier, you may save on your interest rate if you delay taking out that debt consolidation loan until you build your FICO credit score to that next tier. The difference in interest paid between the tiers can be significant, making it worth the delay. 

To build your credit as quickly as possible, focus on avoiding late payments to keep a positive payment history and put as much extra money as possible toward your credit card debt to lower your credit utilization. Your payment history and credit utilization are the two most important factors — they make up 35% and 30% of your FICO score, respectively. 

During this time, avoid applying for any new credit, as this will result in hard credit checks, which can lower your credit score

Getting a co-signer

If qualifying for a loan is proving difficult, and you don’t have time to build your credit score, adding a co-signer with good credit may help you get a lower debt consolidation interest rate. A co-signer takes on equal financial responsibility for the debt consolidation loan, so the lender has reduced risk, resulting in a lower interest rate

The downside is the co-signer may also see their credit score fall because this new loan may appear on their credit report. Also, if you miss a loan payment, the co-signer may get a negative mark on their credit profile, which could impact their creditworthiness when they apply for future financing.

Shopping around

Like any consumer item, different lenders offer different pricing and interest rates on their debt consolidation loans. So, don’t be afraid to shop around for the best possible rates. Be open about the other offers you have, as some companies will meet or beat competitor’s offers to earn your business. 

With a wide range of online lenders to choose from, you can quickly fill out multiple online applications

Shortening your repayment term

The longer you take to repay a debt, the more interest a lender will typically charge. For example, a lender may offer you three loan terms to choose from: a 24-month loan at 10%, a 36-month loan at 15%, or a 48-month loan at 18%. 

While your monthly payment may be lower on the longer-term loans, the reduced interest on the 24-month loan could save you cash throughout the loan.

Lowering your loan amount

In some cases, a high loan amount may push your debt-to-income ratio too high, resulting in more risk and a higher interest rate. Lowering the loan amount could put you into a more positive debt-to-income range and result in a lower interest rate

If a lower loan amount leaves you without enough cash to pay off all your high-interest credit cards, you can first pay off the highest-interest ones while making regular payments on the remaining debts. Once you pay off the first debt consolidation loan, you can always take out another to consolidate any remaining debts. 

Considering a personal line of credit

A personal line of credit may be another option to help you get out from under credit card debt with a lower interest rate. The Tally credit card payoff app, for example, offers as low as 9.9% APR on its line of credit.1 Plus, Tally accepts FICO credit scores as low as 660, so even borrowers with fair credit may be eligible for a lower interest rate

Tally

On top of offering a low interest rate, Tally also manages all your credit card payments for you. You make only one monthly payment to Tally, and it distributes that payment to your credit cards using the debt avalanche method — paying the highest-interest debts first.  

Using your home’s equity

A dad carries his daughter on his shoulders in their front yard

Homes usually appreciate, meaning their value grows over time. So, as you pay down your mortgage and your home value grows, you create home equity — the difference between your home’s value and the total mortgage balance on the home. 

You can tap into your home’s equity by taking out a home equity line of credit (HELOC) or a home equity loan (HEL) to consolidate your debt. Because these loans are tied to your home, they often come with low ratesfar lower than any debt consolidation loan

While most other debt consolidation loans are unsecured debt — there is no collateral for the lender to repossess if you default on your payments — a HELOC or HEL makes your house the collateral on your debt. If you default on the loan, the lender can foreclose on your property. Also, HELOCs and HELs often include costly lender fees, like an origination fee, which may eat into your interest savings. 

Opting for autopay

Check the loan terms of your proposed debt consolidation loan carefully. Some lenders offer interest rate reductions for specific actions. One relatively common tactic is offering a small interest rate reduction — typically about a half of a percentage point — for activating autopay

Autopay allows the lender to automatically deduct the minimum payment from your bank account every month. 

If you have a predictable income, that half a point in savings can save you interest charges over the life of the loan

Checking out balance transfer credit cards

If your high-interest debt balance is relatively low, it may be worthwhile checking out balance transfer credit cards. A balance transfer card offers a low annual percentage rate (APR) for a fixed period — typically six to 18 months. In some cases, these cards offer rates as low as 0% APR. 

If you can transfer all your high-interest debt onto an 18-month 0% APR balance transfer credit card, you can pay off that debt throughout the 18-month promotion without paying a penny of interest. 

This seems like a fantastic deal, but there is a small catch. These cards often charge a 3 to 5% balance transfer fee. So, if you transfer $1,000 onto the balance transfer card, the credit card company will add a $30 to $50 fee. 

Joining a credit union

Credit unions have a wide range of valuable benefits for their members, including free and discounted financial advising and loan offers with attractive interest rates. Check out a few local credit unions to see which you qualify to join then review their personal loan options and lines of credit

You may find the lowest rates are at this credit union, but you need to account for the fees associated with being a member of the credit union to get the true cost of the loan. These fees could negate any interest savings from a great line of credit or a personal loan rate

For example, if you had a three-year loan offer from a traditional lender to consolidate $5,000 in debt at 11% interest, you’d pay $892.97 in interest over the loan term. Say a credit union offered you the same loan but with an 8% interest rate. You’d pay just $640.55 in interest — that’s $252.42 in savings. 

However, if the credit union charges you $15 per month to be a member, you’d pay $540 in fees over the three-year period. Your total cost — the interest plus the credit union fees — for the lower interest rate would be $1,180.55. That means you’d actually save $287.58 by sticking with the higher interest rate from the traditional lender. 

Simplify Your Payments and Get the Lowest Interest Rates

A lender reviews paperwork with a couple

A debt consolidation loan has wide-ranging benefits, including reducing the number of monthly payments you make, putting variable interest rate credit cards on a fixed rate and lowering your overall interest charges. 

If you want to get even lower debt consolidation interest rates, there are plenty of ways to go about it, including: 

  • Improving your credit score
  • Getting a co-signer
  • Shopping around with multiple lenders
  • Shortening your repayment terms
  • Lowering the loan amount
  • Checking out a personal line of credit
  • Using your home’s equity
  • Opting for autopay
  • Using a balance transfer credit card
  • Joining a credit union

While not every option will work for your financial situation, you can choose the ones that do and enjoy a lower debt consolidation loan interest rate on top of all the other benefits.  

1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate.