Debt consolidation loans gain popularity as interest rates rise — here's how to save money on expensive debt

In unpredictable times like these, flexibility is key, especially when it comes to borrowing money for the things we need most. In a pinch, personal loans can be used to cover any number of things, whether it's wedding expenses, surprise medical bills, major home repairs or funeral costs.

Debt consolidation can be an especially strategic way to use them, too, since the process allows borrowers to better organize their debts and typically involves a lender sending funds to creditors on your behalf. Consolidating debt through a personal loan also lets borrowers receive a lower interest rate while they pay back the loan, resulting in significant money being saved over the life of the loan.

A recent study by LendingTree indicated that between the third quarter of 2021 and the third quarter of 2022, personal loan inquiries in general had risen by 12.3%, while inquiries for personal loans to use for debt consolidation had increased by 29.1% during that period of time.

The report pointed to increasing annual percentage rates, or APRs, coinciding with interest rate hikes by the Federal Reserve as the major reason behind the recent spikes.

Below, Select details what you can do if you're interested in taking out a personal loan for the purpose of debt consolidation.

Before applying for a personal loan, you'll want to double-check your credit score. While there are several lenders, such as Upstart and OneMain Financial, that will still consider borrowers with low credit scores or an insufficient credit history, you might end up having to pay a higher interest rate — those with higher credit scores, however, will typically have to pay a lower interest rate.

Next, you'll want to figure out how much money you actually need to borrow. If you're consolidating debt, simply add up all your balances to find a total.

While the smallest personal loan amounts — from a lender such as PenFed Credit Union, for instance — tend to begin around $600, minimum amounts closer to the $1,000 mark are often more common. Be careful not to apply for more than you need since you'll have to pay all the money back eventually.

Then, you'll want to do your homework by researching and comparing the rates, fees and terms of different personal loan providers. Some lenders will allow you to check your rate without hurting your credit score before you even apply.

Ideally, you'll want to go with a lender that offers a low interest rate with no fees (or the fewest fees) and a term length that best fits your budget. LightStream and SoFi are each known for offering personal loans with no late fees or early payoff fees.

When you decide which lender you want to go with, submit your application and wait for approval, which can take anywhere from one to a few days. After that, just wait for the funds to be paid.

With debt consolidation, lenders will typically disburse the money directly to as many as 10 of your chosen creditors — you'll just need to provide their information and how much money each one should be sent. That way, you'll just be on the hook for paying back your personal loan lender.

If you've noticed the APR on your debts rising as interest rates have kept creeping up, consolidating your debt can be a smart and strategic way to lower it while also organizing the money you owe into one monthly payment.

Before you apply for a debt consolidation loan, make sure your credit score is as healthy as possible, as this is the key to helping you get approved for the lowest interest rates available.

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