Debt Consolidation
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What Is a Consolidation Loan?

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If you’re juggling multiple debts, you might be able to simplify repayment with a debt consolidation loan. As long as you qualify, a consolidation loan lets you combine your debts into a new loan with more favorable terms than you had before. Not only can you streamline your debts into a single monthly payment, but you might also be able to lower your monthly bill and save money on interest.

While there are benefits to debt consolidation, though, it isn’t right for everyone.

Here’s what you need to know if you’re thinking about consolidating your credit card or other debt with a consolidation loan:

What is a consolidation loan?

In general, a debt consolidation loan is a personal loan you use to pay off existing debt. This type of installment loan is unsecured (meaning you don’t need collateral to secure the loan) and has fixed interest rates and fixed repayment terms, generally ranging from 12 to 60 months or longer.

When you take out a debt consolidation loan, you’ll often receive funds directly from the lender, and then use that money to pay off your old debts. Some lenders, like Discover Personal Loans, can even pay off creditors directly.

Afterward, you’ll make regular monthly payments on your debt consolidation loan until it is paid off.

A note on student loan consolidation

It’s worth noting that the Department of Education also offers a process called Direct loan consolidation for federal student loans. With a Direct consolidation loan, you combine your federal student loans into a single loan with one monthly payment, as well as choose new repayment terms.

Direct loan consolidation can be a helpful strategy for anyone who wants to simplify their debt or change their repayment plan. It’s also one way to get federal student loans out of default. However, it won’t result in a lower interest rate.

For the purposes of this article, we’ll continue to focus on debt consolidation as it refers to credit card debt or personal loans, not student loan debt.

How does debt consolidation work?

Let’s assume you have three credit cards with a total balance of $10,000. Each card has a different balance and APR, or annual percentage rate. (Your card’s APR is a good estimate of your annual borrowing cost.) Assuming you want to pay off your credit card debt in 60 months, here’s what repayment would look like:

Cost to repay $10,000 in credit card debt

Credit card #1Credit card #2Credit card #3
Monthly payment$71$149$27
Total interest paid$1,282$2,946$623

These calculations assume your APR doesn’t change over a 60-month period.

By the time you pay off your debt, you’d pay $4,851 in interest alone, with monthly payments totaling $247.

With consolidation, you might be able to reduce your overall cost of repayment. Let’s assume you have a 8.83% APR, the average best offered APR in June 2021 to LendingTree users, and you still want to repay your debt over 60 months. Here’s what repayment would look like if we round down to an 8.8% rate:

How a debt consolidation loan reduces repayment costs

Debt consolidation loan
Monthly payment$207
Total interest paid$2,397

With a debt consolidation loan, you’d pay $2,454 less in interest, and your monthly payment would be $40 lower.

Consolidating your debt reduces the number of bills you pay each month. This can make juggling your bills easier. On top of that, debt consolidation loans typically have a fixed interest rate, which means that your repayment is predictable. That isn’t the case with credit cards, which have variable interest rates (and change over time).

But let’s say you just need lower monthly payments to free up cash each month — you could choose a longer repayment term. On the flip side, you could choose a shorter repayment term with higher monthly payments to minimize interest charges.

What’s the difference between debt settlement and consolidation?

Debt consolidation can be a smart strategy for borrowers who have strong credit and the ability to keep up with loan payments. If you’re overwhelmed by your debts and unable to keep up with payments, you might look into debt settlement instead.

Debt settlement involves negotiating with creditors to get rid of your debt. Some creditors might allow you to pay a lump sum that’s less than the amount you owe, since they’d rather get some payment than no payment at all.

However, there’s no guarantee of success with debt settlement, and the fees can be high. Plus, you should be wary of debt settlement programs, since some will charge high fees to negotiate on your behalf, and others might be scams.

Steps to take before you consolidate

Before you commit to a consolidation loan, consider taking the following steps:

  • Examine your spending habits. It’s important to determine how you got into debt in the first place so you can establish new spending patterns moving forward. While a consolidation loan can simplify debt repayment, it’s not going to fix your finances or prevent you from getting into more debt in the future.
  • Negotiate your rates. It’s worth reaching out to your creditors to see if they’ll lower your rates or fees or even adjust your repayment terms. If you can make your debt less expensive with a few phone calls, this approach could be easier than applying for a consolidation loan.
  • Explore all your options. There might be other ways to ease your debt, such as a balance transfer credit card with a 0% APR promotional period or a home equity loan (more on these alternatives below).
  • Shop around for a loan. Some lenders let you prequalify online with a soft credit check. Taking the time to compare multiple offers can help you find the best one for you.
  • Come up with a repayment plan. Before you sign on the dotted line, make sure you understand exactly how you’ll be paying back the loan and how the monthly payment will fit into your budget.
  • Be on the lookout for red flags. There are plenty of debt consolidation scams out there, so make sure you’re dealing with a legitimate financial entity. Be wary of any company that guarantees loan approval with no credit check or asks you to wire transfer money upfront.

Is debt consolidation a good idea?

Whether debt consolidation is a good or bad idea depends on factors such as what your finances look like, what you hope to accomplish and the lenders you qualify for. Debt consolidation can be a good idea if you want to reduce your cost of repayment, free up cash flow or just simplify repayment.

Debt consolidation is a bad idea if it will only cause you to rack up more debt. For example, if you pay off credit card debt with a new loan but continue charging up your credit cards, you’ll only dig yourself deeper into debt.

Further, if you only qualify for a high-interest debt consolidation loan, then it might not make sense to consolidate, as you could end up paying far more with your new loan. And if your old debt has prepayment penalties, you’ll be punished for paying off the balance early using a new loan.


  Simplify repayment. Consolidation rolls multiple debts into one new one.

  Fixed interest rate. Credit cards come with variable interest rates, which change over time according to market conditions. Consolidation loans, however, come with fixed interest rates — that makes it easier to calculate your monthly payments and total loan cost.

  Choose your repayment period. Depending on the lender and your eligibility, you can pick a repayment term of 12 to 60 months or longer. Choose a short term loan with a higher monthly payment to minimize interest charges. Choose a longer term for lower monthly payments but a higher overall loan cost.

  Potentially lower repayment cost. Debt consolidation loans may come with lower APRs than you’d see on a credit card. The top 10% of loan offers in June 2021 had an average 4.16% APR. Across all credit card offers, the average minimum APR was 15.89% in January 2022. However, your credit will heavily affect the offered APRs on consolidation loans you apply for.

  Could improve credit. Your credit mix accounts for 10% of your FICO credit score. A debt consolidation loan account with a history of on-time and in-full payments can improve your credit.


  Best for good credit borrowers. Lenders rely heavily on your credit and financial information to determine loan eligibility. If your credit’s dinged, you could see high APR offers that might not make consolidation worthwhile.

  Potentially high fees. Debt consolidation loans can come with an origination fee, which is an upfront charge for taking out the loan that generally ranges from 1% to 8%. You might also be charged a prepayment penalty if your old debt has one. Double-check the fee structure of your new and old debt to avoid any surprises.

  May encourage more spending. While a debt consolidation loan can help you pay off debt, that’s only the case if you make and stick to a plan for paying off what you owe. If you consolidate debt with a personal loan but continue using credit cards for purchases you can’t pay off, you might never get out of debt.

How to apply for a debt consolidation loan

Applying for a consolidation loan follows the same process as applying for a personal loan. You’ll need to provide documentation that shows the lender that you meet its requirements for income and credit.

First, you’ll need to review your finances and credit. Determine a monthly payment you can afford to make and how long you’d like to be in debt. You should also check your credit score and review your credit reports. Accessing your credit score is easy and can be done through any number of free services, such as LendingTree. To review your credit reports for free, use If you see any errors, dispute them to help boost your credit. Understanding your financial situation and credit can help you determine the lenders you can qualify with and decide what loan terms you’d like.

Research lenders and apply for prequalification. Although you can apply for debt consolidation loans through local lenders like certain big banks and credit unions, online marketplaces like LendingTree can help you research multiple lenders at once. You’ll just provide basic personal and financial information, as well as information on the loan you’re seeking before seeing offers (if you prequalify).

Prequalification doesn’t guarantee you’ll be approved for a loan, but it can help you see what kinds of loan terms you can expect.

Compare lenders and decide which to apply with. Once you’ve prequalified with a few loan consolidation companies, you can compare offers and each lender’s fee structure. Consider factors such as each loan’s APR, fees, repayment terms and borrowing limits. You should choose a consolidation loan that allows you to meet your financial goals, whether that’s minimizing repayment costs or just freeing up more cash each month.

Submit a formal application. When you’re ready to apply, be prepared to submit to a hard credit check, which will temporarily ding your credit. You should also expect to be asked by the lender to provide documentation, like your pay stubs.

Receive a loan decision. Depending on the lender, you can receive a loan decision as quickly as the same day you apply. If approved, you can expect loan funds within a few business days, depending on the lender.

Use loan funds to pay off debt. In most cases, the lender will disburse loan funds via direct deposit. You’ll then use that money to pay off the debt you want to consolidate. In some cases, you can work with your lender to have your debt paid off directly.

How does debt consolidation impact your credit?

Debt consolidation might hurt your credit in the short term, but it could improve it in the long term. At first, your credit score can take a hit when you apply for a new loan and submit to a hard credit inquiry.

What’s more, closing old loan accounts where you have a good track record of on-time payments could also ding your score, since you’ll be shortening your credit history. And if you close credit card accounts completely, you could be reducing your amount of credit available, which in turn could increase your credit utilization ratio. Usually, you want to keep your credit utilization ratio below 30% to protect your credit score.

All that said, the main purpose of borrowing a consolidation loan is to pay off debt more easily, which could result in improvement to your credit score over time. Paying down debt is an effective way to improve your credit, as is making on-time payments.

So if a consolidation loan will help you pay off your debt and you’re confident you can keep up with payments, it could result in a net improvement in your credit score. Note that missing payments on a consolidation loan — or any loan — will damage your credit.

What to do if your consolidation loan application is denied

Loan applications can be denied for a variety of reasons, but one common culprit is a low credit score. If the lender denies your request, you should get an adverse action notice explaining why.

If your credit is the issue, try requesting a free copy of your report from Look over your accounts for areas that you need to improve. You can also monitor your credit score for free through some credit card companies or a service like LendingTree. For a fee, you can also monitor your FICO Score on

It might also be worth applying with a different lender, as you might find one that’s not as strict as the one that rejected your application. That said, avoid any lender that guarantees approval, as this kind of unrealistic promise indicates that the company could be a scam.

If you need to pay down debt to improve your score, try creating a budget to identify areas where you can cut spending or increase your income. A couple of debt repayment strategies to consider are the debt snowball — where you target debts with the smallest balance first — and the debt avalanche — where you prioritize debts with the highest interest rate.

Your “amounts owed” makes up 30% of your FICO Score, so if you can make a dent, you might improve your score enough to qualify for a consolidation loan, which could in turn help you pay off your debts more easily.

Alternatives to debt consolidation loans

A debt consolidation loan might not be your only option. Here are some alternatives to consider:

Balance transfer credit cards

Balance transfer credit cards can be an affordable alternative to a debt consolidation loan, as they often come with an introductory 0% APR promotion for new customers. This type of offer typically lasts 12 to 21 months and can allow you to pay off transferred balances at a deep discount. However, if you don’t repay the full balance before the introductory period ends, you’ll continue to accrue interest on the remaining balance, so be sure you can repay the balance before the intro period is over.

Be prepared to pay balance transfer fees, as well. These can range from 3% to 5% of the transferred amount.

Balance transfer credit cards are best for those who …

  • Have strong credit
  • Can pay down credit card debt quickly, typically within 12 to 21 months
  • Would save money even after accounting for a 3% to 5% balance transfer fee
  • Can reliably manage a revolving credit account

Home equity loans

Home equity loans allow you to borrow against the equity you have in your home. As a secured loan, your home is used as collateral, so you can lose it if you default on the loan, but you could see competitive APRs even if you don’t have perfect credit.

While you can expect lower interest rates than those offered on a debt consolidation loan, be prepared for fees such as application or loan processing fees, underwriting fees, lender or funding fees, appraisal fees, document preparation and recording fees and broker fees. You’ll also need at least 15% equity in your property after your loan closes to qualify for a home equity loan.

Despite these drawbacks, you can expect an overall lower fixed APR when compared to a debt consolidation loan, as well as longer loan terms and possibly higher borrowing limits, depending on your equity.

Home equity loans are best for those who …

  • Have decent credit
  • Have enough equity in their home to qualify
  • Are comfortable using their home as collateral
  • Want a fixed monthly payment, a potentially low APR and a long loan term

Debt management plan

A debt management plan involves seeking help from a nonprofit credit counseling agency to manage your outstanding debt. With this type of plan, you’ll deposit money each month with the agency, which then uses those funds to pay all your bills. The agency may also be able to arrange lower interest rates and payments on your accounts to make repayment more affordable, and you can expect collection calls to stop. This type of plan could last 48 months or longer.

Credit cards enrolled in a debt management plan will likely be closed except for one that can be used for emergencies or travel. Though debt management plans are great for people struggling with debt and poor credit, nearly anyone who needs these services can qualify. Plan on paying a monthly fee for these services (though it can be waived for certain customers).

Debt management plans are best for those who …

  • Have bad credit
  • Are struggling to juggle multiple bills
  • Are able to stop using credit, except for emergencies
  • Want third-party help to get their finances on track and to negotiate for better terms on their behalf

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