Key takeaways

  • The process of debt consolidation rolls two or more of your monthly bills into one payment.
  • Handling debt consolidation with a personal loan can help you pay off debt faster.
  • Borrowers with strong credit and high-interest debt are the best candidates for debt consolidation personal loans.

Managing all of your debts — with multiple due dates, interest rates and minimum payment amounts — can be a lot to keep track of. Missing one payment can hurt your credit score and your chances of borrowing money in the future.

That’s why rolling all your monthly bills into a single payment with a new personal loan for debt consolidation can be a good way to simplify your financial life, keep your credit strong and make it easier to repay what you owe each month. Of course, debt consolidation is only worthwhile if you know you will spend less on interest than you already pay on your current debts.

What is the difference between debt consolidation and a personal loan?

A debt consolidation loan is a type of personal loan. Some lenders offer them as different products, but they are essentially the same. Both are fixed-rate installment loans that have a set monthly payment.

Personal loans

Personal loans are used for a variety of expenses — including debt consolidation. But they are not restricted to a specific use. If needed, you could use a portion of your personal loan for debt consolidation and another portion of it for an approved expense, like a home improvement project.

Debt consolidation loans

A debt consolidation loan is a personal loan that has a specific purpose. In most cases, your lender will require you to use your loan funds to consolidate two or more debts — and may not allow you to use it for another purpose. Because of this, you will need to apply with debt consolidation as the reason for your loan.

The lender will then either pay you in a lump sum — which may be the case if you plan on using the funds for multiple expenses — or send the money directly to your creditors.

How a personal loan works for debt consolidation

A personal loan is a debt product that can be used for almost anything. You’ll receive the funds in a lump sum and make monthly payments over a set period. And, personal loans are usually unsecured, meaning they aren’t backed by collateral and don’t put you at risk of losing your asset.

Some consumers get personal loans and use the proceeds solely to consolidate debt, which is why you’ll often hear the term “debt consolidation loan.” Using a personal loan to consolidate debt involves paying off all your credit cards, loans and other debt with the loan proceeds and making one manageable payment toward your loan each month until it’s paid off.


To illustrate, assume you have the following credit cards:

  • Card 1 carries an APR of 15 percent, the minimum monthly payment is $25, and the outstanding balance is $500. (Time to payoff: 24 months; Total interest paid: $78)
  • Card 2 carries an APR of 17 percent, the minimum monthly payment is $30, and the outstanding balance is $750. (Time to payoff: 32 months; Total interest paid: $182)
  • Card 3 carries an APR of 19 percent, the minimum monthly payment is $35, and the outstanding balance is $1,000. (Time to payoff: 39 months; Total interest paid: $341)

If you take out a personal loan for $2,250 with a 36-month term and 10 percent interest rate, your monthly payment will be $73, slightly lower than you’re already paying. More importantly, you will only pay $363.64 in interest over the loan term — a decrease of $237.36.

A personal loan can also help keep your accounts in good standing and preserve your credit score if you have multiple types of debt. Falling behind on any of your payments, whether for a credit card or student loan, can crush your credit score. It could also hinder your chances of borrowing money or getting competitive terms on debt products in the future.

Pros and cons of debt consolidation with a personal loan

While there are several benefits to consolidating debt with a personal loan that make it an attractive option, weigh both the perks and drawbacks before applying to one.

Pros of debt consolidation with a personal loan

  • One monthly payment: It can be difficult to keep track of multiple monthly debt payments. A debt consolidation loan simplifies your finances and allows you to make a single monthly payment.
  • Lower interest rates: Personal loans often come with higher rates than secured debt, but they may have lower rates than credit cards.
  • Pay debt off faster: With a lower interest rate, you may be able to save money and pay your debt off sooner with a personal loan.
  • Improve your credit score: Using a personal loan to consolidate debt can improve your credit score by increasing your available credit, which reduces your credit utilization ratio.

Cons of debt consolidation with a personal loan

  • Potentially high interest rates: Personal loans usually have lower interest rates than credit cards, but personal loan rates can exceed 30 percent for borrowers with poor credit.
  • Extra upfront costs: When you take out a personal loan, you may be subject to loan origination fees. Other common fees can include prepayment penalties and late payment fees.
  • Could encourage more spending: Debt consolidation doesn’t solve the root of why you got into debt. If you consolidate your credit card debt with a personal loan, you might be tempted to take on new debt.

When to get a personal loan for debt consolidation

High-interest debt, such as credit card debt, might make you a good candidate for a debt consolidation loan since personal loans tend to have lower interest rates than credit cards.

  • You have strong credit: The better your credit, the more likely you are to qualify for a loan at the lowest interest rate. The lower your interest rate, the less you have to pay on top of the money you borrow.
  • You have significant — but controlled — debt: If your debt is large but you can make at least minimum monthly payments, a personal loan might work best for you.
  • You can stick to your budget: Before you get a personal loan, review your finances to make sure you can afford the loan and pay your debt both now and in the future.

When not to get a personal loan for debt consolidation

Although a personal loan for debt consolidation can help you save money and get out of debt faster, it may not always be the best choice.

  • Your credit score is low: It’s possible to qualify for a personal loan if you don’t have great credit. Unfortunately, it’s highly likely that you’ll only qualify for steep interest rates, possibly making the costs of consolidating outweigh the benefits.
  • You don’t qualify for lower interest rates:  If the personal loan rates you’re offered are higher than what you’re paying on your debt now, try alternative methods for tackling your debt. Once your credit improves, you may qualify for debt consolidation loans with better terms.
  • You’re struggling to afford your minimum monthly payments: You could get a more affordable monthly payment by consolidating. However, if money’s already tight, you may struggle to make on-time payments, which could be detrimental to your credit.

Other ways to consolidate debt

If a debt consolidation personal loan doesn’t work for you, there are a few alternative ways to consolidate debt.

Home equity loan

If you own your home and owe less on your mortgage than the house is worth, you may be able to take out a home equity loan and use it to pay off your outstanding debt. A home equity loan is a type of second mortgage that allows you to borrow against your home’s equity. You can use the lump sum you receive from your home equity loan to pay off all your outstanding debt and then make a single payment on the new loan each month.

For home equity loans, your home is collateral. As a result, the lender views your loan as less risky, meaning interest rates are typically lower than unsecured loans such as personal loans. However, you could lose your home if you fall behind or fail to make payments on your home equity loan. Calculate your home’s equity to see if you’d qualify to borrow enough to cover your outstanding debt.

Balance transfer credit cards

You could try a balance transfer credit card if you want to manage a few credit card balances. Many cards offer 0 percent APR for a set amount of time, usually from 12 to 21 months.

This is a good way to move all your existing credit card debt into one manageable monthly payment. Remember that if you have a lot of credit card debt, you might not get approved for a balance transfer that’s the full amount you need to move over. That means you could be paying off your new card balance and any cards that couldn’t get moved over.

If you don’t pay a balance transfer credit card off before the 0 percent APR period ends, the card issuer starts charging interest, often at a high rate.

Debt payment strategies

You might have to manage your debt differently if you don’t qualify for debt consolidation. If you haven’t done so, start by organizing your debt on a spreadsheet. Write out every lender you owe money to, your current interest rate, how much you owe and your monthly due date. From there, you can consider one of these two debt management methods:

  • Debt snowball: This method focuses on paying your smallest debt off first. While making minimum payments on every other debt, you put all your extra cash toward the debt with the lowest balance. Once that’s paid off, you focus on putting all your extra money toward the next-lowest balance. Do this until all your debt is paid in full. The upside is that you’ll see results fast. The downside is that you might pay more interest on other debt with higher rates.
  • Debt avalanche: This method first focuses on paying off the debt with the highest interest rate. You make minimum payments on all your other debts and then put all your extra cash toward the debt with the highest interest rate. Do this until the debt is paid off, and then move on to the debt with the next-highest interest rate until all your debt is paid in full. While you might save more money by paying higher-interest debt off first, you might not see results as fast as you would with the debt snowball method.