Debt consolidation loans explained
A debt consolidation loan replaces several debts with one fixed-rate loan. It can lower your interest and simplify payments, but only in the right situation.
How it works
You take out a personal loan, use it to pay off credit cards or other debts, then repay the loan in fixed monthly installments over a set term, often 2 to 7 years. Rates depend largely on your credit score, income, and debt-to-income ratio.
When it can help
- The loan's APR, including any origination fee, is lower than the average rate on your current debts.
- The monthly payment fits your budget, and the term isn't so long that total interest rises.
- You won't run the paid-off cards back up.
Watch out for
- Origination fees, often 0% to 10% of the loan, deducted up front.
- Longer terms that lower the payment but raise total interest.
- Companies that promise to settle or 'erase' debt for an up-front fee. Debt settlement is different from consolidation and can hurt your credit.
How to compare
Run your current debts through the calculator above to see your total interest with the avalanche. Then compare it to the loan's total cost: monthly payment × number of months, plus fees, minus the amount borrowed. Many lenders let you check your rate with a soft credit inquiry that doesn't affect your score.
Nonprofit credit counseling agencies can also offer debt management plans; the U.S. Department of Justice keeps a list of approved agencies.
Lower your interest rate? Compare personal loan offers
A consolidation loan only helps if its APR, including any origination fee, is lower than what you pay now, and you stop adding new balances.
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Frequently asked questions
Does a debt consolidation loan hurt your credit?
Applying usually involves a hard inquiry, which can lower your score slightly for a while. Paying down card balances can lower your utilization and help over time.
Is a consolidation loan better than a balance transfer?
A 0% balance transfer can be cheaper if you can pay it off within the promotional period. A personal loan offers a fixed rate and end date, which suits larger balances.
What credit score do I need?
Requirements vary by lender. The best rates generally go to good or excellent credit.
Related tools and guides
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