The average American household carries $104,755 in debt, including mortgages, credit cards, auto loans and student loans, according to June 2025 data from Experian. For people struggling with multiple high-interest debts, personal loans offer a practical consolidation solution.
Personal Loans as a Consolidation Tool
Personal loans allow borrowers to combine multiple debts into one loan with a fixed interest rate and consistent monthly payment. Unlike credit cards with variable rates, personal loans provide predictable repayment terms.
"One of the most common ways we see members try to consolidate and pay down their debt is with our personal loan," said Yolanda Martinez of Advancial Federal Credit Union.
The strategy is particularly effective for credit card debt. The average credit card interest rate was 19.83% as of early December 2025, according to Bankrate, down from a record-high 20.79% set in August 2024.
"By refinancing those balances through a consolidation loan at a lower rate, borrowers can save hundreds or thousands of dollars in interest charges," said Martinez.
Understanding Personal Loan Rates
Personal loan rates vary widely based on creditworthiness, loan amount and repayment term. Borrowers with excellent credit scores typically qualify for rates in the single digits, while those with fair credit may see rates in the high teens or low 20s.
Keep an eye on the Federal Reserve
The Federal Reserve's benchmark interest rate directly influences personal loan rates. As the Fed adjusts rates to control inflation or stimulate economic growth, lenders typically adjust their personal loan rates accordingly.
A borrower consolidating $15,000 in credit card debt at 19.83% could save significantly by refinancing with a personal loan at 9.90%. Over three years, the credit card debt would cost approximately $4,900 in interest with minimum payments, while a personal loan at 9.90% would cost roughly $2,350 in interest, saving more than $2,500.
Factors That Affect Personal Loan Rates
Several factors determine the interest rate a borrower receives:
Credit score is the primary factor. Borrowers with scores above 720 typically qualify for the best rates, while those with scores between 640 and 719 receive moderate rates. Borrowers with scores below 640 may face higher rates or difficulty qualifying.
Loan term affects rates. Shorter-term loans, such as two or three years, often carry lower interest rates than longer five or seven-year terms. However, shorter terms mean higher monthly payments.
Loan amount can impact rates. Some lenders offer better rates for larger loan amounts, while others provide tiered pricing based on how much is borrowed.
Income and debt-to-income ratio matter. Lenders want to see that borrowers have sufficient income to repay the loan comfortably, typically requiring debt payments to be less than 40% of gross monthly income.
How Personal Loans Work for Debt Consolidation
When using a personal loan for consolidation, borrowers receive a lump sum that pays off existing debts. They then make a single monthly payment on the new loan, often at a lower interest rate than their previous obligations.
Personal loans typically range from $1,000 to $50,000, with repayment terms from two to seven years. Borrowers with good to excellent credit scores generally qualify for the lowest rates.
Comparing Personal Loan Rates
When shopping for a personal loan, financial experts recommend comparing rates from multiple lenders. Credit unions often offer lower rates than traditional banks or online lenders because they are not-for-profit institutions that return earnings to members through better rates and lower fees.
The annual percentage rate, or APR, is the most important number to compare because it includes both the interest rate and any fees charged by the lender. Some lenders charge origination fees of 1% to 8% of the loan amount, which increases the total cost even if the stated interest rate seems competitive.
"Borrowers should look at the total cost of the loan, not just the monthly payment," said Martinez. "A loan with a low interest rate but high fees may cost more than one with a slightly higher rate and no fees."
Personal Loan Benefits Beyond Lower Rates
Personal loans offer several advantages for debt consolidation:
Fixed monthly payments make budgeting easier compared to fluctuating credit card minimums. Borrowers know exactly when their debt will be paid off, unlike revolving credit card balances. No collateral is required for unsecured personal loans, unlike home equity loans that put homes at risk.
When Personal Loans Make Sense
Financial advisors say personal loans work best for consolidation when borrowers have:
- Multiple credit card balances with high interest rates
- Good to excellent credit scores (typically 670 or higher)
- Steady income to make consistent monthly payments
- Discipline to avoid running up new debt after consolidation
Rate Shopping Without Hurting Credit
Many borrowers worry that applying for multiple personal loans will damage their credit scores. However, credit scoring models typically treat multiple loan inquiries within a 14 to 45-day period as a single inquiry when rate shopping. This allows borrowers to compare rates from several lenders without significantly impacting their credit scores. Many lenders also offer prequalification tools that provide estimated rates based on a soft credit check, which does not affect credit scores.
Alternative Loan Options
For members with savings accounts, Advancial offers secured loans that allow borrowers to borrow against their deposits or stock certificates while still earning dividends on their savings. These secured loans may offer even lower rates than unsecured personal loans.
Pitfalls to Avoid with Personal Loans
Financial experts warn that personal loan consolidation can backfire if borrowers:
- Run up new credit card balances after paying them off with the loan
- Extend loan terms too long, paying more interest over time despite a lower rate
- Ignore origination fees that increase the total cost
- Fail to compare rates from multiple lenders
- Fail to address underlying spending habits that created the debt
Advancial Federal Credit Union is a Covering Katy News subject matter expert, recognized as a trusted authority on banking and credit union topics. Businesses interested in Subject Matter Expert positioning can contact Dennis Spellman at Dennis@CoveringKaty.com.