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Loans

Most people get personal loans for debt consolidation—here's the average amount

CNBC Select shares how high the average debt consolidation and credit card refinancing loans were in early 2020 and explains how a personal loan can save you money.

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Recent studies reveal that debt consolidation is the top reason why people take out personal loans.

According to an April study by Bankrate that analyzed responses from more than 160,000 applicants, debt consolidation was the most reported reason for getting a loan in quarter one, at 38%. An additional 5% of applicants in Bankrate's study selected credit card refinancing as their main motivation.

Meanwhile, the online lending marketplace LendingTree reported that in the last month of 2019, 35.7% of loan applicants were looking to consolidate debt, and 31.4% of applicants cited credit card refinancing as their main reason for requesting a loan.

In addition, both studies revealed that debt consolidation loans were also the largest dollar amounts requested, far greater in comparison to loans for other needs like emergency expenses, vacations, weddings and even home improvements.

Below, CNBC Select explains the difference between debt consolidation and credit card refinancing, how each works and how a personal loan could save you money.

The difference between debt consolidation and credit card refinancing

The two biggest reasons that people get personal loans are to consolidate debt and/or to refinance the APR on high-interest debt.

Debt consolidation is when you have multiple credit cards and want to streamline your payments into one monthly bill. You can take out a personal loan large enough to pay off all of the accounts, then pay back the lender over a period of months until the loan is repaid. The average American has four credit cards, and it can be overwhelming to track multiple due dates and APRs. If keeping track of your payments is starting to feel like too much, debt consolidation is one way to simplify things.

Credit card refinancing is helpful when you have high-interest debt on one or more cards and you want to save money by lowering your APR. It's a good idea to consider refinancing your credit card debt if you know you need more time to pay off your balance, but your interest rates are so high that you feel you can't get ahead.

While these two purposes are distinct, a personal loan can help you do both: simplify payments and save on interest.  Whether from an online lender or a brick-and-mortar bank, personal loans tend to offer lower interest rates than credit cards — but not always — so it's important to understand the terms of a loan before you sign up for it.

See our top picks for personal loans:

CNBC Select's list of the best 5 personal loans

How debt consolidation and refinancing loans work

Using a personal loan to consolidate debt and/or refinance your credit card APR is similar to using a balance transfer card with a 0% APR period, but they work a little differently.

When you take out a personal loan, the cash is usually delivered directly to your checking account for you to use to pay your creditors. Then, you pay the loan company back in monthly installments, typically at a fixed interest rate. Personal loan lenders may charge a sign-up, or origination, fee, but most don't charge any fees other than interest.

Balance transfer credit cards are an alternative to personal loans, if you can qualify for one that will benefit you. They offer a period of time — anywhere between 6 and 21 months —where you can pay off your debt with 0% interest. They typically come with fees between 2% and 5%, unless you qualify for a no-fee balance transfer card. When you open a new balance transfer card, you request your old credit card balance to be transferred electronically to the new card, which you should aim to pay off within the introductory 0% interest period.

For example, both the Citi® Double Cash Card and the U.S. Bank Visa® Platinum Card allow you to transfer debt from an existing credit card, but charge a fee that equals 3% of your balance ($5 minimum).

Balance transfer credit cards require excellent credit to qualify, whereas there are a variety of personal loan options for people with fair credit and good credit.

How much is the average debt consolidation loan

In both studies, debt consolidation loans were the most requested loan type out of every category.

Lending Tree reported that 2018 debt consolidation loans averaged $12,670, and credit card refinancing loans averaged even higher at $14,107.

Bankrate reported that the average requested loan amount for all personal loans was between $2,000 and $25,000, but within this range, 48% of loans between $10,000 and $24,999 and 52% of loans $25,000+ were marked for debt consolidation.

How personal loans help you save money

Currently, consumer credit card interest rates average about 16.6% according to the Fed's most recent data from February 2020. On the other hand, the average APR for 24-month personal loans is 9.63%

If you hypothetically had $10,000 worth of credit card debt with a 16.61% APR, you would pay a total of $2,656.53 in interest, to pay it off over three years (according to Experian's APR calculator). But if you took out a personal loan with 9.63% APR, you would only pay $1,447.90 in interest.

In the above scenario, you could benefit from a potential savings of $1,208.63. So while some experts are alarmed by the rapid growth of personal loans, there is no doubt that incorporating them into your debt payoff plan can save you money in the long run, as long as you understand the terms of the loan.

The best personal loans

When compiling our list of the best personal loans, CNBC Select evaluated dozens of lenders. We looked at key factors like interest rates, fees, loan amounts and term lengths offered, plus other features including how your funds are distributed, autopay discounts, customer service and how fast you can get your funds.

None of the lenders on this list charge early payoff penalties or upfront fees for processing your loan. (Read more about our methodology below.)

Our methodology

To determine which personal loans are the best, CNBC Select analyzed dozens of U.S. personal loans offered by both online and brick-and-mortar banks, including large credit unions, that come with no origination or signup fees, fixed-rate APRs and flexible loan amounts and terms to suit an array of financing needs.

When narrowing down and ranking the best personal loans, we focused on the following features:

  • No origination or signup fee: None of the lenders on our best-of list charge borrowers an upfront fee for processing your loan.
  • Fixed-rate APR: Variable rates can go up and down over the lifetime of your loan. With a fixed rate APR, you lock in an interest rate for the duration of the loan's term, which means your monthly payment won't vary, making your budget easier to plan.
  • Flexible minimum and maximum loan amounts/terms: Each lender provides a variety of financing options that you can customize based on your monthly budget and how long you need to pay back your loan.
  • No early payoff penalties: The lenders on our list do not charge borrowers for paying off loans early.
  • Streamlined application process: We considered whether lenders offered same-day approval decisions and a fast online application process. 
  • Customer support: Every loan on our list provides customer service available via telephone, email or secure online messaging. We also opted for lenders with an online resource hub or advice center to help you educate yourself about the personal loan process and your finances.
  • Fund disbursement: The loans on our list deliver funds promptly through either electronic wire transfer to your checking account or in the form of a paper check. Some lenders (which we noted) offer the ability to pay your creditors directly.
  • Autopay discounts: We noted the lenders that reward you for enrolling in autopay by lowering your APR by 0.25% to 0.5%.
  • Creditor payment limits and loan sizes: The above lenders provide loans in an array of sizes, from $500 to $100,000. Each lender advertises its respective payment limits and loan sizes, and completing a preapproval process can give you an idea of what your interest rate and monthly payment would be for such an amount.

After reviewing the above features, we sorted our recommendations by best for overall financing needs, debt consolidation and refinancing, small loans and next-day funding.

Note that the rates and fee structures advertised for personal loans are subject to fluctuate in accordance with the Fed rate. However, once you accept your loan agreement, a fixed-rate APR will guarantee interest rate and monthly payment will remain consistent throughout the entire term of the loan. Your APR, monthly payment and loan amount depend on your credit history and creditworthiness. To take out a loan, lenders will conduct a hard credit inquiry and request a full application, which could require proof of income, identity verification, proof of address and more. 

Information about the U.S. Bank Visa® Platinum Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.