When you’re already in debt, taking out another loan may be the last thing on your mind. That makes total sense. Borrowing is what got you into this mess in the first place, right? However, debt consolidation loans were specifically designed to assist people who need debt relief. This guide will teach you what you need to know before you begin sifting through the wide variety of consolidation loans that are on the market today.

What is debt consolidation?

You consolidate your debt when you roll multiple debts into one sum that requires one monthly payment. You can do this in a couple of different ways.

Learn more about debt consolidation »

What do debt consolidation loans do?

A debt consolidation loan is a personal loan that’s specifically used to combine multiple debts into a single monthly payment. You take out a loan and use the funds you receive to pay off multiple debts, usually of the same type.  This offers several advantages:

  1. It simplifies repayment, so you only have one bill to worry about.
  2. In many cases, it lowers the interest rate applied to the debt, so you save money.
  3. It may lower your monthly payment and it always offers fixed monthly payments, which are easier to manage in your budget.
  4. You can get out of debt faster, even though you may pay less each month because it makes debt repayment more efficient.

See if you qualify for a personal debt consolidation loan.

Apply Now

How do debt consolidation loans work?

Credit card debt consolidation loans are the most common. They offer low interest rates and fixed monthly payments that are often lower than what you pay now. Reduced interest charges mean you can often get out of debt faster, even though you pay less each month.

  1. You apply for a loan that large enough to cover your credit card debts and other obligations you want to pay off.
  2. You choose a term that offers monthly payments that fit your budget; 36 to 60 payments is recommended.
  3. The lender reviews your debts and credit to see if you qualify, based on your credit score and debt-to-income (DTI) ratio.
  4. If approved, the interest rate will be based on your credit score.
  5. Your DTI must be below 41% to get approved; if your ratio is only below 41% once all your other debts are repaid, then the lender will require direct disbursement. This means they send the money directly to your other creditors instead of giving it to you.
  6. This zeros out your credit card balances, leaving only the loan to repay.

A consolidation loan for credit card debt can also be used to consolidate other types of unsecured debt. This includes:

  • Store credit cards
  • Gas cards
  • Other unsecured personal loans
  • In-store credit lines
  • IRS and state back taxes
  • Child support arrears

There are consolidation loans for student loan debt. However, you generally must consolidate student loans separate from other types of debt.

Credit card debt consolidation combines multiple debts into a single monthly payment

How is a debt consolidation loan different from a balance transfer card?

Debt consolidation loans and balance transfer credit cards are both solutions for paying off your debt. There are some key differences between the two that you should keep in mind before picking one or the other.

First, a balance transfer is a type of credit card, not a loan. You transfer all of your current credit card debts onto the balance transfer card, which usually has 0% APR for a certain period of time that’s generally less than two years. This means you have an interest-free period to pay off all of your credit card debt.

A debt consolidation loan is much more structured. Unlike a balance transfer that allows you to charge new purchases on the card and decide for yourself how much you will pay per month, debt consolidation loans require a specific amount. This guarantees the amount of time it will take to pay off your debt.


How to qualify for a debt consolidation loan

To qualify for a debt consolidation loan, you must be:

  • 18 years of age or older
  • A legal resident of the United States
  • Have a bank account that can be verified
  • Not be in bankruptcy
  • Not be in foreclosure

These requirements are the absolute minimum. There are more factors, such as your credit score and your debt amount, that will determine rates and terms.

Apply for a personal loan online in just two minutes.

Get Started

Debt consolidation loan rates

This chart from Value Penguin shows you the kind of debt consolidation loan rates you can expect for different levels of credit scores. Keep in mind that other fees (like the common origination fees) may raise the amount you owe for your loan.

Credit ScoreAverage Loan Rate
Excellent (720 – 850)4.52% – 20.57%
Good (680 – 719)6.67% – 28.33%
Average or Fair (640 – 679)7.05% – 30.32%
Poor (300* – 639)15.06% – 36.00%

*Many lenders require a minimum credit score of 580 or higher. Borrowers with scores under 600 may find it difficult to qualify for a personal loan without a cosigner or collateral; your results may vary by lender.

How to know if debt consolidation loans are right for you

This depends on your financial situation, but it many cases, they can be the best solution. If you have multiple debts to repay and your budget is spread too thin, consolidation loans can be extremely beneficial.

If your total amount of credit card debt is over $5,000 and you have a credit score that will qualify you for a reasonable interest rate, a debt consolidation loan may be your best option for debt relief. You roll your debts into a single monthly payment and make debt repayment more efficient. As a result, you can pay less and still get out of debt faster. You save both money and time.

Do debt consolidation loans hurt your credit?

When used correctly, debt consolidation loans should improve your credit rather than hurt your credit. A consolidation loan pays off your balances in-full, so it’s good for your credit history. It also improves your credit utilization ratio – the ratio that measures credit use versus total credit limit. These are the two biggest factors used to calculate credit score. So, a consolidation loan can be extremely beneficial for your credit.

However, if you consolidate in the wrong circumstances and can’t keep up with the payments, default will hurt your credit. You can also damage your score if you don’t keep up with the minimum payment requirements on your debts during underwriting. Before you receive loan approval, make sure to meet all assigned payments on your debts; otherwise, you can create missed payments in your credit history

When are debt consolidation loans bad?

  1. When they increase, rather than decrease total interest charges
  2. If the loan increases your monthly payments to an amount you can’t afford to meet comfortably
  3. If you don’t have steady income to meet the fixed monthly payments

Private student loan debt consolidation is also bad if you ever think you may need a federal relief option or loan forgiveness.

Can I get a debt consolidation loan with bad credit?

Yes, but bad credit is one of the factors that may make a consolidation loan less beneficial. For Federal Direct consolidation loans, credit score is not a factor for qualification. So, even if you have a 500 FICO score you can consolidate student loan debt, as long as it originated from a federal program.

For credit card debt and private student loan consolidation, your credit score doesn’t just impact loan approval. It determines the interest rate you qualify to receive on the new loan. If the rate is too high, it doesn’t provide the cost savings you need. The monthly payments will be higher, as well.

Always make sure to calculate loan costs carefully when looking for debt solutions. Consider monthly payment and total interest charges; weigh this against what you’re paying now. If the loan doesn’t offer monthly savings or reduce your total interest charges, you may be better off with another solution.

Explore the full range of solutions for credit card debt »

Article last modified on February 11, 2020. Published by Debt.com, LLC

Reviewed By

Howard Dvorkin, CPA

CPA and Chairman