Debt Consolidation

What Is a Consolidation Loan?

What is a consolidation loan

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If you’re struggling with debt or tired of managing multiple monthly payments, a consolidation loan could be the answer. Consolidation loans, also referred to as debt consolidation loans, make it possible to combine several loans into one — often at a lower interest rate than you had before.

The benefits of consolidation loans can be long-lasting, but they’re not foolproof. Keep reading to learn more about debt consolidation loans, how they work and what risks to keep in mind.

What is a consolidation loan?

Simply put, a consolidation loan is a new loan that consumers use to pay off their other debts. With loan consolidation, consumers might be able to go from juggling several different loans to having a single one with just one monthly payment.

Here’s an example of how loan consolidation might work:

Let’s say a consumer named Steve has five credit cards with total balances of $10,500. The annual percentage rates (APRs) on his cards vary from 8 to 15 percent, and he must make five separate payments each month to keep up and avoid delinquency and late fees.

Exasperated by the complexity and cost of his credit card balances, Steve takes out a consolidation loan and uses the proceeds to pay off his $10,500 in debt. Once he pays off his cards, Steve is left with a single loan (his consolidation loan) and a single payment every month. Because the interest rate on his consolidation loan is only 7 percent, Steve is also able to save on interest every month.

Benefits of a debt consolidation loan

While it might sound counter intuitive to take out a new loan when you’re already juggling several debts, loan consolidation comes with notable benefits.

    • Simpler repayment. Jonathan Mills Patrick, an author and former banking executive, says one of the biggest benefits of consolidation loans is the simplicity they can bring to your life. “Get all your payments in place,” Patrick says. “Instead of juggling several credit card payments, you can conveniently lump them together.”
    • A lower interest rate. “Depending on the rate environment, you could get a better interest rate than you’re paying on your high interest debts,” Patrick says. Of course, the rate you’ll qualify for depends on factors such as your credit score and job history.
    • A fixed rate on your debts. You may be able to transition from a variable rate to a fixed one, Patrick says. You can also go from a place where you have multiple loans with various interest rates to a single loan with one more manageable rate.
    • A speedier exit from debt. With a lower interest rate, you may be able to get out of debt faster if more of your payments are going toward the principal of your loan. The key to using a consolidation loan to get out of debt faster is to pay more than the minimum payment, Patrick says. Ideally, you’ll consolidate your debts and pay as much as you can every month until you’ve paid off the entirety of your loan.
    • Extended repayment terms and a lower payment. On the other hand, if you’re struggling to keep up with all your payments, you could use loan consolidation to extend the repayment timeline of your debts and get a lower monthly payment. This won’t help you pay off debt faster, says Patrick, but it can make your debts more manageable.

  • A financial plan. Debt consolidation allows some people to move forward with their financial life as long as they consolidate debt as part of a broader plan to improve their financial health. “The hope is that you have a more manageable payment at a lower interest rate,” says Green. “But you also need a plan that can help you get out of debt. Consolidate your debt and have a plan to reduce and eliminate it.”

Risks of a debt consolidation loan

Borrowing money is never-risk free, and that’s true even when you’re consolidating debts you already have. Before you take out a debt consolidation loan, consider these downsides:

    • You may not get out of debt. While a debt consolidation loan can help you pay off debt faster, that’s only the case if you make and stick to a plan for paying off what you owe. If you don’t pay your debts off, you’re really just moving debt around,” Patrick says. You may also need to change your spending habits to stop adding to your debt.
    • You could pay high fees. If you get in the habit of consolidating debt or doing balance transfers all the time, you may pay a lot of fees over the years, Patrick says. This can include fees for new consolidation loans or balance transfers.
    • You might get a false sense of accomplishment. “Going from several credit cards or loans to one might make you feel like you’ve made progress when you really haven’t paid off any debt,” Patrick says. This deceiving feeling could make you feel comfortable spending more when you should be focusing on paying off your loan.

  • You’re taking a risk. Any time you borrow money, you’re putting your credit on the line. If you don’t repay your debt consolidation loan, you could damage your credit score or wind up in default or collections, Patrick says. Of course, this was also true with the loans or credit card balances you had before. On that topic, here’s a helpful guide from our subsidiary MagnifyMoney on how to handle debt you can’t afford.

Who’s right for a consolidation loan?

Generally speaking, “a debt consolidation loan is a good choice for people who do it for the right reasons,” says Green. Usually, those reasons include wanting to get out of debt or simplify your finances by reducing your number of payments.

If you’re consolidating debt just to borrow more, that is typically a bad move, says Green.

The people who do best with loan consolidation tend to be “people who are disciplined, people who are determined to pay down debt, and people who are willing to quit using credit as a crutch,” he says. If you fit one of those categories, then consolidating is a smart option to consider.

Different types of debt consolidation loans

There are several financial products you can use for debt consolidation, and the right one for you will depend on your circumstances. Here are some options to consider:

Personal loans

A personal loan is a straightforward financial tool you can use to consolidate debt. Personal loans have a fixed repayment timeline and typically come with a fixed interest rate. This means you’ll make the same payment amount for the life of the loan until your balance is paid off.


  • You can qualify for a fixed interest rate and a predictable monthly payment.
  • You know exactly when you’ll pay off your loan.


  • You might pay a higher interest rate than with some other options, because personal loans are unsecured.
  • Any time you borrow more money, you’re putting your credit at risk.

Personal loans are best for …

  • Individuals who want a fixed monthly payment for a specific length of time
  • People who can afford the fixed monthly payment for the entirety of the loan
  • People who want to get out of debt for good.

What you need to qualify

  • Your credit score plays a huge role in whether you can qualify for loans and, if so, what your interest rate will be. While it’s advantageous to have a very good or exceptional credit score (FICO score of 740 or higher), some lenders will approve you for a personal loan with a FICO score of 600 or higher.
  • You need to be able to prove you can repay the loan, typically through proof of employment.

How to get started

If you’re interested in applying for a personal loan, the best step to take now is to compare lenders and offers online, which you can do right here on LendingTree. Make sure to compare loan terms such as interest rate, credit qualifications and applicable fees to find the right loan for you. You can also check out MagnifyMoney’s guide to the best debt consolidation loans for details on options that can help you get out of debt once and for all.

Compare Personal Loan Rates

Home equity loans

Home equity loans allow you to borrow against the equity you have in your home. With a home equity loan, you’ll use your home as collateral to access to the cash you need.


  • You can qualify for a fixed interest rate and get a predictable monthly payment.
  • With a home equity loan, you know exactly when your loan will be paid off. “Payments are amortized over a longer period of years if you choose, so you can pay down your consolidated debt over time,” Green says.
  • You may be able to deduct interest paid on a home equity loan when you file your taxes. You should speak with a tax professional to inquire about this possibility.
  • Because home equity loans are secured by your home, your interest rate may be lower than with other loan options.


  • Since you’re using the home as collateral, you could lose your home if you default on the loan.
  • You typically need at least 20 percent equity in your property after your loan closes. If you don’t have enough equity, you can’t take out a home equity loan.
  • Home equity loans are not free. You’ll need to pay fees, including: application or loan processing fees; origination or underwriting fees; lender or funding fees; appraisal fees; document preparation and recording fees; and broker fees.

Home equity loans are best for …

  • Individuals who want a fixed monthly payment for a fixed length of time
  • Homeowners with a considerable amount of equity in their properties

What you need to qualify

  • You typically need to have at least 20 percent equity in your home after your loan closes to qualify.
  • You need to be able to prove you can repay the loan, typically through proof of employment.

How to get started

Before you take out a home equity loan, you need to estimate how much your home is worth. You may need to pay for an appraisal of your home to determine how much you can borrow.

To find the best home equity loan for your needs, make sure to shop around with several lenders and compare terms, including the interest rate and length of the loan in your considerations. Also pay close attention to fees.

Compare Home Equity Loan Rates

Balance transfer credit cards

Balance transfer credit cards come in many different forms, but the best variations come with an introductory offer that is hard to beat. Generally speaking, these cards offer 0 percent APR on transferred balances for anywhere from 12 to 21 months.

Once you apply for a balance transfer credit card and get approved, you’ll transfer your balances from old cards and start making payments on the new card balance with 0 percent APR.


  • Getting 0 percent APR for 12 to 21 months can let you save money on interest payments.
  • The fact you’re not paying interest for a limited time can help you secure a lower monthly payment.
  • You can consolidate all your credit card debts in once place and make one monthly payment.


  • That 0 percent APR is only for a limited time. After that, there’s a reset to a higher rate.
  • If you don’t focus on paying down debt, you may merely be moving debt around.
  • Balance transfers can be expensive. Typically, you’ll pay a balance transfer fee equal to 3 to 5 percent of your balance to take advantage of one of these offers, though there are some cards with no balance-transfer fee.

Balance transfer credit cards are best for …

  • Individuals who want to pay down credit card debt quickly
  • People who want to save money on large balances with a 0 percent APR promotion
  • Anyone who is serious about simplifying his or her debts

What you need to qualify

  • While some of the best balance transfer cards are only available to those with high FICO scores of 750 or higher, some cards may be available to those with poor credit with a score of at least 600.
  • You need to be able to prove you can repay any amounts you borrow.

How to get started

To find the best balance transfer credit card for your needs, take some time to compare offers online. Make sure to compare cards based on the length of their respective introductory offers, their typical interest rates thereafter, and all applicable fees.

Compare Balance Transfer Cards


Before you apply for a debt consolidation loan, consider some alternatives. The following options can be used in place of loan consolidation, although they have their own advantages and disadvantages.

Debt management plan

A debt management plan (DMP) involves seeking help from an outside company to manage your debts.

“In a DMP, you deposit money each month with the credit counseling organization,” according to the FTC, the Federal Trade Commission. “It uses your deposits to pay your unsecured debts, like your credit card bills, student loans and medical bills, according to a payment schedule the counselor develops with you and your creditors.”


  • Your creditors may lower your interest rates, which could help you pay down debt faster.
  • Your debt management company can help walk you through each step of the process.
  • You have a structured plan to keep you on track toward getting out of debt.


  • Some debt management plans aren’t as efficient as others, which is why you should consider this option carefully. “Don’t sign up for one of these plans unless and until a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money,” the FTC says.
  • Some debt management plans may charge high or unnecessary fees, not all of which are disclosed, according to the FTC.
  • If you don’t make payments to your DMP on time, you can lose all the progress you have made in your plan.
  • Entering into a DMP requires permanently or temporarily closing your credit accounts, leaving you without access to credit should you need it. Closing your accounts can also hurt your credit score in the short term, though it should go up over time.
  • If you settle your accounts for less than you owe through a DMP, it can show up on your credit report and hurt your credit score.

Debt management plans are best for …

  • Individuals who are in serious debt and need outside help but want to avoid bankruptcy

What you need to qualify

  • Since debt management plans are for people struggling with debt and poor credit, nearly anyone who needs these services can qualify.

How to get started

The FTC suggests researching this option thoroughly before moving forward. It suggests asking questions of all debt management plans you consider, including the services offered and the fees involved. Make sure you understand your plan and all costs involved before you let a third party help manage your debts or pay someone for help.

Debt settlement

“Debt settlement programs typically are offered by for-profit companies, and involve them negotiating with your creditors to allow you to pay a ‘settlement’ to resolve your debt — a lump sum that is less than the full amount that you owe,” notes the FTC.

They also require you to set aside a specific lump sum in savings every month so you’re able to settle your debts once a deal has been reached.


  • If you complete the program, your debts could be wiped away.
  • By “settling” your debts, you could wind up paying less than what you owe.


  • Creditors generally won’t settle a debt until it’s gone unpaid for a long time, and you’ll damage your credit score getting to that point.
  • Many people struggle to save the money needed to settle their debts.
  • Your creditors aren’t obligated to settle.
  • Companies that initiate these settlements charge fees, although they vary from firm to firm.

Debt settlement is best for …

  • Individuals who are unable to pay their full debts and need help settling them

What you need to qualify

  • Since these programs are geared toward people struggling with poor credit and unmanageable debt levels, almost anyone who needs these services can qualify.

How to get started:

As the FTC notes, some debt settlement companies fail to deliver on their promises or try to collect upfront fees before they settle your debts. The commission suggests doing your homework before you apply for one of these programs. Read reviews about the company you’re considering, and read all the fine print and terms before you agree to a program.


Filing bankruptcy can be a last resort for someone who is struggling with unmanageable levels of debt. This process, which is run through the court system, can reduce or eliminate amounts you owe.



  • According to Consumer Affairs, bankruptcy will likely damage your credit so much that you won’t be able to qualify for new credit for several years.
  • There are costs involved with filing bankruptcy: It isn’t free. “A standard fee for filing is $335 for Chapter 7 and $310 for Chapter 13. This does not include attorney fees, should you decide to hire an attorney to help with your case,” writes Consumer Affairs. “You will also need to pay for the required credit counseling.”
  • You will need to rebuild your severely damaged credit.

Bankruptcy is best for …

  • Someone who is overwhelmed with their debts and unable to dig their own way out

How to get started

Before you file for bankruptcy, make sure you’re comparing other options that may be less harmful to your credit and easier to execute. Speak with a lawyer about your options and determine whether bankruptcy is truly the right move for you.


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