It can be challenging to manage multiple debt accounts at once, but you may be able to find relief with a debt consolidation loan. They are readily available through traditional banks, credit unions and online lenders and come in two forms: secured and unsecured loans.

Both secured and unsecured debt consolidation loans can help you shave several months or even years off your repayment period. Furthermore, you may save a bundle in interest by getting a debt consolidation loan with a more competitive interest rate and using it to eliminate your existing debt balances.

How a debt consolidation loan works

A debt consolidation loan is a personal loan used to roll several debt balances into a new loan product. You’ll typically get a loan term of one to 10 years and a set monthly payment because the interest rate is fixed.

Ideally, the interest rate on a debt consolidation loan should be lower than what you currently have to maximize cost savings. But if you qualify for less than the total amount you owe on credit cards and loans, consider using the loan proceeds on the debts with the highest interest rates.

Here’s an illustration of how to use a debt consolidation loan to save a bundle on credit card interest:

  • Card 1: $1,500 balance and 17 percent APR
  • Card 2: $2,000 balance and 15 percent APR
  • Card 3: $2,500 balance and 12 percent APR
  • Card 4: $3,000 balance and 21 percent APR

Now, assume you pay off these balances in 24 months. You’d spend $1,629 in interest. But if you’re approved for a $9,000 24-month personal loan with an APR of 8 percent, your interest costs will drop to $573.25.

You can use a personal loan calculator and credit card payoff calculator to compute potential interest savings with a debt consolidation loan.

Top 3 best debt consolidation loans

Happy Money

Happy Money offers personal loans through several partner lenders. Its loans are designed to help consumers consolidate high-interest credit card debt, though you can use funds for just about any other purpose. Loan amounts range from $5,000 to 40,000.

APR range: 11.25% to 24.50%


LightStream is a top consolidation option for consumers with good to excellent credit. Its rates are competitive, and there are no fees. Plus, LightStream offers a wide range of loan amounts — you can borrow up to $100,000.

APR range: 7.99% to 25.40% (with autopay)


Avant may be a good option if you have bad credit — it approves borrowers with credit scores as low as 580. If approved, can you receive funds as fast as the next business day. Loan amounts range from $2,000 to $35,000.

APR range: 9.95% to 35.99%

How to use a secured loan for debt consolidation

Secured loans are backed by collateral, making them riskier for borrowers. However, they may be worthwhile, depending on your financial situation. You can use any of these secured loan products for debt consolidation.

Secured personal loan

This operates like a traditional loan and can be easier to access if you have less than perfect credit. Still, there are downsides to consider. You could get a hefty interest rate and risk losing your collateral if you fall behind on the loan payments.

Home equity loan or home equity line of credit (HELOC)

Both home equity loans and HELOCs lets you convert a portion of your home’s equity, or the difference between what your home is worth and what you currently owe, into cash.

If you take out a home equity loan, you’ll receive the entire amount you borrow in a lump sum and repay in equal monthly installments since the interest rate is fixed. A HELOC acts as a credit card, and you can pull funds from it as needed. You’ll only repay what you borrow from a HELOC, and the interest rate is variable.

Both home equity loans and HELOCs are ideal for debt consolidation because they feature more competitive interest rates than you’ll find with personal loans. Plus, you could get approved for a large amount if you have a lot of equity in your home. The major disadvantage is losing your home to foreclosure if you default on the loan since these products act as second mortgages.

How to use an unsecured loan for debt consolidation

Unlike secured loans, there are no collateral requirements to get approved. There are two types of unsecured loans for debt consolidation and a credit card option.

Unsecured personal loan

This loan product allows you to consolidate your debts to simplify the repayment process. You’ll get a fixed interest rate and a more manageable monthly payment. Most lenders feature rapid approval and funding times. However, you may incur origination fees if you take out a loan. You could also be subject to a prepayment penalty if you decide to pay the loan off early.

Peer-to-peer loan

Unlike personal loans, they are offered by individual investors who extend unsecured loans to consumers who meet their lending criteria. You may be eligible for a loan with fast funding times, even if you don’t have perfect credit. The downside is your borrowing costs may be higher with poor credit than they would if you took out a home equity loan. Furthermore, some peer-to-peer loans come with brief repayment periods.

Balance transfer credit card

You’ll get an introductory period – typically up to 18 months – with a low or zero interest rate. If used to pay off your high-interest credit card debt and repaid within this window, you’ll save a fortune in interest.

Pros and cons of a debt consolidation loan

Before you take out a debt consolidation loan, consider these potential advantages and disadvantages.


  • Potentially save money. If you qualify for a loan with a lower interest rate than your existing debt, you can save thousands of dollars over the life of the loan.
  • Streamline monthly payments. When you consolidate your debt, you merge multiple debts into a single debt with one monthly payment. Having to keep up with one monthly payment can be easier than juggling several monthly payments.
  • Get rid of debt quicker. Securing a lower interest rate can also help you achieve debt-freedom quicker if you don’t extend your loan term since more money goes toward your principal balance instead of interest. 


  • Doesn’t address the reason why you got into debt. If you don’t fix the reason why you got into debt in the first place — for example, overspending — you find yourself deeper in debt even after taking out a debt consolidation loan.
  • Fees. Some personal loan companies charge origination fees — these fees are subtracted from your loan amount and can increase your total borrowing costs.
  • Potentially pay more interest. If you take out a debt consolidation loan with a longer repayment term than your existing loan, you may pay more interest over the life of the loan.

How to get a debt consolidation loan

You can apply for a debt consolidation loan through a traditional bank, credit union or online lender. Ideally, you should have a credit score that’s in the mid-600s and a debt-to-income (DTI) ratio that doesn’t exceed 45 percent to have the best chance at qualifying for a loan with competitive terms. A lower credit score won’t automatically result in a denial, but you can expect higher borrowing costs and less favorable loan terms.

Be mindful that each lender has unique eligibility requirements, so it’s best to inquire before you apply to ensure the lender you’re considering is a good fit.

Bottom line

A debt consolidation loan makes managing multiple debt accounts easier, and you can pay off your balances faster and save a ton in interest. Before applying, evaluate secured and unsecured loans to decide which option is best. It’s equally important to shop around, get pre-qualified without impacting your credit score and run the numbers to determine if consolidating debt makes sense or if you should hold off until your credit health or overall financial situation improves.