5 Factors to Consider When Choosing a Debt Consolidation Loan

The average American has multiple credit cards — between two and three, to be exact. But this number factors in those U.S. adults who have zero cards; excluding that group brings the average number up to 3.7 cards.

Once you consider how many Americans also have medical bills and/or personal loans, you can see how the process of paying bills can become downright complicated. Trying to keep track of multiple accounts month after month leaves room for payments to slip through the cracks, possibly hurting your credit score and sending your stress levels through the roof.

Taking out a debt consolidation loan is one solution aimed at simplifying debt repayment and reducing the amount of interest you have to pay. It entails taking out a loan, using it to repay the rest of your debts, then repaying the loan at a fixed rate over the course of months or years — depending upon the terms to which you agreed when signing.

Before you go skipping down to your bank or credit union — or start searching online for a lender offering loans — make sure you know the most important factors to consider when choosing the right deal for you.

Here are five key factors to keep in mind.

Interest Rate
According to ValuePenguin, the average range of interest charged on this type of loan goes from 8.31 percent up to 28.81 percent. The exact rate for which you qualify will depend heavily on your credit history, the size of the loan and the lender with which you're working.

Say you're looking to alleviate the burden of carrying a balance on a handful of credit cards every month. Consolidating your debt is only a smart move “if you're able to secure a lower APR than the weighted average cost of your existing debt,” per ValuePenguin.

Length of Loan
The longer the loan, the higher the interest rate tends to be. It's also more of a commitment to make monthly payments for the long haul, so it's generally advisable to choose the shortest loan length for which monthly payments are feasible for your budget.

It's also important to avoid racking up new debt while working on paying down your consolidation loan. Stretching out the repayment period makes this proposition trickier, which can increase the chances you'll be juggling “old” debt and “new” debt at the same time.

Monthly Payment
The next question to ask is, “How much will my monthly payments be, given the amount I'm looking to borrow, the length of the loan and the interest rate I can get?”

A higher monthly contribution will help you speed up repayment — but may put a strain on your finances. You'll want to find the sweet spot where you're paying back your loan at a good clip while keeping monthly payments reasonable. After all, biting off more than you can chew in this department may lead to missing payments or defaulting on the loan. The absolute last thing you want is to find yourself in more financial trouble than when you started.

Prepayment Penalties
It seems like it'd make sense to pay off any loan as quickly as possible. So, it may surprise you to find out some consolidation loans carry prepayment penalties. However, you may find the prepayment penalty is lower than the amount you'd pay in interest to stretch the loan out for its original term. This is where it becomes essential to read the fine print and crunch the numbers.

Lender's Reputation
Carefully consider any lender's reputation before entering into an agreement, especially online lenders not affiliated with your bank or credit union. Look up reviews from previous borrowers online to get a better feel for what to expect from the process. Keep an eye out for red flags that may indicate a scam or an unscrupulous company.

Debt consolidation can be like putting together a puzzle.

These are the key pieces that must fit together to make it a success.