Juggling multiple debt payments every month is exhausting. Different due dates, different interest rates, and different minimum payments make it easy to miss something or lose track of your progress entirely.
A debt consolidation loan can simplify everything into one payment. But is it the right move for you?
This guide covers how consolidation loans work, who should (and shouldn't) use them, and how to decide if consolidation makes sense for your situation.
What Is a Debt Consolidation Loan?
A debt consolidation loan is a personal loan you use to pay off multiple existing debts. Instead of managing several payments to different creditors, you make one monthly payment to your new lender.
Here's how it works in practice:
- You have $15,000 in debt across 4 credit cards
- You take out a $15,000 personal loan at a lower interest rate
- You use that loan to pay off all 4 credit cards immediately
- Now you have one loan payment instead of four credit card payments
The debts don't disappear, you still owe $15,000. However they've been restructured into a single manageable payment, often at a lower interest rate.
How Debt Consolidation Loans Work
Step 1: Add Up Your Debts
Start by listing every debt you want to consolidate:
- Credit card balances
- Medical bills
- Personal loans
- Store credit cards
- Other unsecured debts
Add up the total. This is how much you'll need to borrow.
Step 2: Check Your Credit Score
Your credit score determines what interest rate you'll qualify for. Here's a general breakdown:
Expected APR Based on Credit Score
720+: 8-12%
680-719: 13-18%
640-679: 18-25%
Below 640: 25%+ or may not qualify
If your credit score qualifies you for a rate lower than your current average, consolidation could save you money.
Step 3: Shop for Loans
Compare offers from multiple lenders:
- Banks
- Credit unions
- Online lenders (SoFi, LightStream, Upgrade, etc.)
Look at:
- APR (not just interest rate, APR includes fees)
- Loan term (how many months to repay)
- Monthly payment
- Origination fees (some lenders charge 1-8% of the loan amount)
- Prepayment penalties (can you pay it off early without fees?)
Step 4: Apply and Pay Off Existing Debts
Once approved, you'll receive the loan funds. Some lenders will pay your creditors directly, some deposit the money in your account and you pay the debts yourself.
Either way, make sure every old debt gets paid to $0.
Step 5: Make Your New Single Payment
Now you have one loan with one payment due each month. Set up autopay and focus on paying it down.
Pros and Cons of Debt Consolidation Loans
Advantages
Single monthly payment. No more tracking multiple due dates. One payment, one amount, same day every month.
Potentially lower interest rate. If your credit is decent, you could drop from 20%+ credit card APRs to 10-15% on a personal loan.
Fixed payoff date. Credit cards have no end date and you can pay minimums forever. A consolidation loan has a set term (usually 2-7 years), so you know exactly when you'll be debt-free.
Can improve credit score. Paying off credit cards reduces your credit utilization ratio, which can boost your score. A mix of credit types (installment loan vs. revolving credit) also helps.
No collateral required. Unlike home equity loans, most debt consolidation loans are unsecured which means your house or car isn't at risk.
Disadvantages
You might not qualify for a good rate. If your credit is poor, the rate offered might be higher than what you're already paying. In that case, consolidation doesn't help.
Fees can add up. Origination fees of 3-8% are common. On a $20,000 loan, that's $600-$1,600 added to your balance before you start.
Longer terms mean more interest. A lower monthly payment over 7 years might feel easier, but you could pay more total interest than a 3-year term.
It doesn't fix spending habits. If you consolidate your credit cards then run them back up, you'll end up with even more debt than you started.
Risk of false progress. Paying off credit cards feels like a win. However until you pay off the consolidation loan, you haven't eliminated any debt you're just moving it.
Debt Consolidation Loan Requirements
Every lender is different, but here's what most look for:
Credit Score: Most mainstream lenders require 640+. For the best rates, you'll need 700+. Some online lenders work with lower scores but charge higher rates.
Debt-to-Income Ratio: Lenders prefer a DTI under 40-50%. This is your monthly debt payments divided by your gross income.
Stable Income: You'll need to prove you can make the monthly payments. Lenders typically require pay stubs, tax returns, or bank statements.
Minimum Loan Amount: Most lenders have minimums of $1,000-$5,000. If you only need to consolidate $2,000, options may be limited.
Debt Consolidation Loan vs. Other Options
Not sure if a consolidation loan is your best bet? Here's how it compares to alternatives:
vs. Balance Transfer Credit Card
Balance transfer cards offer 0% APR for 12-21 months. If you can pay off your debt in that window, you'll pay zero interest.
Choose balance transfer if:
- You have good credit (700+)
- You can pay off the debt before the promo ends
- Your debt is under $10,000
Choose a consolidation loan if:
- You need more time to pay off debt
- You want a fixed payment schedule
- You're worried about the temptation of open credit cards
You can calculate balance transfer savings with our balance transfer calculator.
vs. Home Equity Loan or HELOC
Home equity options often have lower rates (because they're secured by your house). However if you can't pay, you could lose your home.
Choose home equity if:
- You have significant equity
- You're disciplined about repayment
- The rate difference is significant
Choose a consolidation loan if:
- You don't want to risk your home
- You don't have enough equity
- You need funds quickly (HELOCs take longer to close)
vs. Debt Management Plan
A debt management plan (DMP) is set up through a non-profit credit counselor. They negotiate lower rates with your creditors and you make one monthly payment to the agency.
Choose a DMP if:
- Your credit is too low for a good loan rate
- You want professional guidance
- You don't qualify for traditional consolidation
Choose a consolidation loan if:
- You qualify for a low rate on your own
- You don't want a third party involved
- You want to maintain full control
vs. Debt Settlement
Debt settlement involves negotiating to pay less than you owe. It sounds appealing but tanks your credit and can result in tax liability on forgiven debt.
Avoid debt settlement unless:
- You're already severely behind on payments
- Bankruptcy is your only alternative
- You understand the long-term credit damage
How to Pay Off Your Consolidation Loan Faster
Getting a consolidation loan is step one. Paying it off efficiently is where the real savings happen.
Make More Than the Minimum
Even $50-100 extra per month can shave months off your loan and save hundreds in interest.
Use the Debt Avalanche or Snowball Method
If you have other debts alongside your consolidation loan, use a proven payoff strategy. Target either the highest-interest debt (avalanche) or smallest balance (snowball) to build momentum.
Round Up Payments
If your payment is $347, pay $400. The extra $53/month adds up to $636/year in extra principal payments.
Apply Windfalls
If you come across tax refunds, bonuses, birthday money, etc, make sure you put at least half toward your loan.
Track Everything
When you see your balance dropping and your payoff date moving closer, you stay motivated.
Should You Get a Debt Consolidation Loan?
Consolidation Makes Sense If:
- You have multiple high-interest debts (especially credit cards over 18% APR)
- You qualify for a consolidation loan at a lower rate than your current average
- You have stable income and can commit to the monthly payment
- You won't run up your credit cards again after paying them off
Consolidation Doesn't Make Sense If:
- The loan rate is higher than your current debts
- You'd extend your payoff timeline so much that you pay more total interest
- Your debt is small enough to pay off in 6-12 months without consolidating
- You haven't addressed the spending habits that created the debt
The Bottom Line
A debt consolidation loan is a tool, not a solution. It can simplify your payments, reduce your interest rate, and give you a clear finish line. It won't work if you don't commit to the repayment plan and avoid taking on new debt.
Before you apply, calculate your current average interest rate and compare it to what you'd qualify for. If the math works in your favor and you're ready to stay disciplined, consolidation can accelerate your path to debt-free.
Relief can help you pay off debt faster and help lower your balance. Get Relief
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