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What is debt consolidation?

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Sukanda Panpa / EyeEm/Getty Images/Illustration by Austin Courrege/Bankrate
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Sukanda Panpa / EyeEm/Getty Images/Illustration by Austin Courrege/Bankrate
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Even if you’re working hard to manage your money the right way, paying off high-interest debt every month can make it hard to reach your financial goals. No matter how much you owe, it can take months or even years to get out of debt.

One way to deal with multiple debt payments is by consolidating. Debt consolidation is a form of money management where you pay off existing debts by taking out one new loan, usually through a debt consolidation loan, a balance transfer credit card, student loan refinancing, a home equity loan or a HELOC.

What is debt consolidation?

Debt consolidation is the process of merging multiple debts into a single debt. Instead of making separate payments to multiple credit card issuers or lenders each month, you roll them into one payment from a single lender, ideally at a lower interest rate.

You can use debt consolidation to merge several types of debt, including:

  • Auto loans
  • Credit cards
  • Medical debt
  • Payday loans
  • Personal loans
  • Student loans

While debt consolidation won’t wipe out your balance, the strategy can make it easier and less expensive to pay off debt. If you get a low interest rate, you could save hundreds or even thousands of dollars in interest. Managing one payment can also make it easier to stay on top of your bills and avoid late payments, which can hurt your credit.

Types of debt consolidation

No matter what type of debt you’re consolidating, if you’re looking for how to consolidate debt, you have a few options to choose from.

Debt consolidation loan

Debt consolidation loans are personal loans that consolidate multiple loans into one fixed monthly payment. Debt consolidation loans generally have terms between one and 10 years, and many will let you consolidate up to $50,000.

Most lenders do not specify how the loan proceeds can be used. So, it’s up to the borrower to apply the loan proceeds to the outstanding credit card and loan balances they want to consolidate. You’ll also begin making monthly payments to the new lender for the duration of the loan.

Ideally, you want to focus on the debts with the higher interest rates first. Also, this option only makes sense if your new loan’s interest rate is lower than the interest rates of your previous credit card or loan products. While you could get a more affordable monthly payment if the lender extends the loan term, you’ll still pay far more in interest by consolidating.

Best for: Borrowers who want a more streamlined repayment process.

Balance transfer credit card

If you have multiple credit card debts, a balance transfer credit card can help you pay down your debt and minimize your interest rate. Like a debt consolidation loan, a balance transfer credit card transfers multiple streams of high-interest credit card debt onto one credit card with a lower interest rate.

Most balance transfer credit cards offer a 0 percent APR introductory period, typically lasting anywhere from 12 to 21 months. If you can manage to pay off all or most of your debt during the introductory period, you could potentially save thousands of dollars in interest payments.

However, if you have a large outstanding balance after the period is over, you may find yourself in more debt down the road, as balance transfer credit cards tend to have higher interest rates than other forms of debt consolidation.

Best for: Borrowers who can afford to pay off credit cards quickly.

Student loan refinancing

If you have high-interest student loan debt, refinancing your student loans could help you obtain a lower interest rate. Student loan refinancing lets borrowers consolidate both federal and private student loans under one fixed monthly payment and better terms.

While refinancing can be a great way to consolidate your student loans, you’ll still have to meet eligibility requirements. Also, if you refinance federal student loans, you’ll lose federal protections and benefits, like income-driven repayment and deferment options.

Best for: Borrowers with high-interest private student loans.

Home equity loan

A home equity loan — often referred to as a second mortgage — lets you tap into your home’s existing equity. Most home equity loans come with repayment periods between five and 30 years, and you can typically borrow up to 85 percent of your home’s value, minus any outstanding mortgage balances.

Home equity loans tend to have lower interest rates than credit cards and personal loans, since they’re secured by your home. The downside is that your home is at risk of foreclosure if you default on the loan.

Best for: Borrowers with a lot of equity in their home and a stable income.

Home equity line of credit

A home equity line of credit (HELOC) is a home equity loan that acts as a revolving line of credit. Like a credit card, a HELOC allows you to withdraw funds as needed with a variable interest rate. A HELOC also taps into your home’s existing equity, so the amount that you can borrow is dependent on the equity you have in your home.

A HELOC is a long-term loan, with the average draw period — the period of time when you can draw funds — lasting 10 years. The repayment period can last up to 20 years, during which time you can no longer borrow from your credit line.

Best for: Borrowers with a lot of home equity who want a long repayment timeline.

How to consolidate your debt

If you’re trying to figure out how to consolidate debt, the process is fairly similar no matter which form of debt consolidation you are using. It’s important to understand that debt consolidation is different from debt settlement. With debt consolidation, you will use the funds from your new debt consolidation loan to pay off all of your existing debts in full.

Once you’ve gotten the funds from your personal loan, home equity line of credit or other debt

consolidation loan, you can start the debt consolidation process. Use those funds to pay off all of your existing debts. Then you will have only one monthly loan payment, generally with a lower interest rate than all of the interest rates on your previous loans.

Debt consolidation pros and cons

Debt consolidation isn’t the right choice for everyone; before consolidating your debt, consider the pros and cons.


  • Credit score improvement. You could see a credit score boost if you consolidate your debt. Paying off credit cards with a debt consolidation could lower your credit utilization ratio, and your payment history could improve if a debt consolidation loan helps you make more on-time payments.
  • Less total interest. If you can consolidate multiple debts with double-digit interest rates into a single loan with an interest rate below 10 percent, you could save hundreds of dollars on your loan.
  • Simpler debt repayment process. It can be hard to keep track of multiple credit cards or loan payments each month, especially if they’re due on different dates. Taking out one debt consolidation loan makes it easier to plan your month and stay on top of payments.


  • Collateral at risk. If you use any type of secured loan to secure your debt, such as a home equity loan or HELOC, that collateral is subject to seizure should you fall behind on payments.
  • Higher possible cost of debt. Your potential for savings with a debt consolidation loan depends largely on how your loan is structured. If you have a similar interest rate but choose a longer repayment timeline, for instance, you will ultimately pay more in interest over time.
  • Upfront costs. Any form of debt consolidation could come with fees, including origination fees, balance transfer fees or closing costs. You’ll want to weigh these fees with any potential savings before applying.

How to decide if debt consolidation is right for you

Debt consolidation makes the most sense if your spending is under control and your credit score is high enough to qualify for a more competitive interest rate than you’re currently paying. You should also consider your current debt load when deciding if debt consolidation is right for you. If it’s manageable, doesn’t take up an excessive amount of your monthly gross income, and will take more than a few months to pay off, consolidating your debt could be a smart financial move.

When not to consolidate debt

Debt consolidation is only effective if you’re disciplined enough to stop using the credit cards you pay off. Otherwise, you risk accumulating far more debt than you started with. It’s equally important to ensure you can afford the amount of the monthly payment on the debt consolidation loan. If the payment stretches your budget too thin, you could fall behind rather quickly and damage your credit rating.

Also, consider your credit rating before you decide to consolidate debt. If your credit score is on the lower end, the lender or creditor will likely only offer steeper interest rates to help you consolidate what you owe.

Bottom line

If you’re interested in debt consolidation, make sure that you have considered the underlying reasons for how you got into debt in the first place. If you’re in a more stable place but have debt from earlier in your life, then debt consolidation can make a lot of sense. Take the time to examine all of your options and get quotes from several lenders, including credit unions, online banks and other lenders. Compare interest rates, fees and terms before finalizing your decision.

Learn more:

Written by
Zina Kumok
Contributing writer
Zina Kumok has been a full-time personal finance writer since 2015. She’s a three-time nominee for Best Personal Finance Contributor/Freelancer at the Plutus Awards and a two-time speaker at FinCon, the premier financial media conference.
Edited by
Loans Editor
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