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What Is Debt Consolidation?

Debt consolidation can help you streamline debt repayment and save money. However, it can also end up costing you more and putting you at risk of deeper debt.

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By Jessica Walrack

Written by

Jessica Walrack

Writer

Jessica Walrack has over a decade of experience in personal finance. Her work has been featured by CBS News MoneyWatch, USA Today, U.S. News and World, Investopedia, and The Balance Money.

Edited by Meredith Mangan

Written by

Meredith Mangan

Senior Editor

Since 2011, Meredith Mangan has helped steer content creation in mortgages and loans, insurance, credit cards, and investing for major finance verticals, including Investopedia and The Balance.

Updated October 8, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

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Are you feeling overwhelmed by multiple debt payments each month and wondering if you’re overpaying? Enter — debt consolidation. 

By consolidating multiple debts into a single new loan or credit card, many borrowers can streamline their payments and reduce their borrowing costs. 

But is the move right for you? Here’s a look at the ins and outs of debt consolidation and when it can be a good idea.

What does debt consolidation mean?

Debt consolidation refers to combining multiple debts into a single, larger debt. It involves using a debt consolidation loan or credit line to pay off two or more smaller debts. For example, getting a $10,000 personal loan and using it to pay off $5,000 in credit card debt and $5,000 in medical bills is considered debt consolidation.

Consolidating debt can be beneficial if you can get a lower interest rate than what you have on your existing accounts. For example, say you have $5,000 of credit card debt across three credit card accounts that have an average annual percentage rate (APR) of 25%. 

With monthly payments of $250, it will take you 26 months to pay off the balance, and you’ll pay $1,380 in interest. On the other hand, if you get a debt consolidation loan with a 15% APR and make the same $250 monthly payments, you could pay off the $5,000 balance in 23 months and would pay just $713 in interest.

Consolidating debt can also streamline your repayment process, as multiple payments each month can be stressful, time-consuming, and lead to multiple late fees if you miss payments. 

Further, revolving credit accounts only require minimum payments each month that can leave you in an endless cycle of paying mostly interest. If you opt for an installment loan and use it to pay off multiple debts, you’ll have a single monthly payment and a clear path to paying off the debt in full.

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Types of debt consolidation loans

You can consolidate debt in a few different ways, including through balance transfer credit cards, personal loans, or home-equity-backed loan products.

Balance transfer credit cards

A balance transfer credit card allows you to move an outstanding balance from an existing credit card over to the balance transfer card, often for a fee of 3% to 5% of the transfer amount.

But when are balance transfer cards good for debt consolidation? They can be helpful if you have outstanding balances on multiple credit cards and can get approved for a new card with an interest rate that’s lower than the rates on your existing cards. 

No-interest introductory periods may also be a good idea. However, be mindful of the promotional term and the normal APR after the promotion ends. If you can’t pay off your debt balance during the introductory period, you’ll be charged interest on the outstanding balance at the card’s standard rate.

For example, say you have a $2,000 credit card balance with a 29.99% APR and are making $140 monthly payments — you would pay off the balance in 18 months and pay $436 in interest. 

If you get a balance transfer card with an 18-month 0% APR promotion and 5% balance transfer fee, you could make the same $140 monthly payment, but pay the new balance off ($2,100) in 15 months, and save $336.

Personal loans

Personal loans, sometimes referred to as debt consolidation loans, are lump sum installment loans that you repay through monthly payments over a set term, such as five years, plus interest and fees. Many financial institutions offer them, including banks, credit unions, and online lenders

Available loan amounts often range from $1,000 to over $100,000 and terms typically range from two to seven years. Plus, lenders can send loan funds to your creditors directly, and may even discount your rate for it.

Personal loans can be a good option if your credit is in decent shape. They’re usually unsecured, so approval will depend heavily on your credit profile. Shop for loans online and get prequalified with multiple lenders to see what APR and terms you might qualify for.

Once you prequalify, compare loan amounts, APRs, fees, loan term lengths, monthly payment amounts, overall costs, funding times, and customer satisfaction ratings between lenders. For example, if time is of the essence, choose lenders with quick funding times. 

Note that prequalification is not an offer of credit, but gives the lender (and you) an idea of what you might qualify for based on your credit profile. You’ll need to formally apply once you decide which lender to go with. The lender will conduct a hard credit inquiry when you apply which could temporarily ding your score.

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Important: Prequalification does not hurt your credit score, but applying for a loan can lower your score temporarily by a few points.

Home equity loan products

Home equity loan products — including home equity loans, home equity lines of credit (HELOCs), and cash-out refinance loans — are an option worth considering for homeowners who are looking into debt consolidation. 

If you go this route, you’ll borrow against a portion of the equity you’ve built in your home. The way the loan works depends on the product you choose:

  • Home equity loan: A lump sum payment that you repay, plus interest, over a set term, such as 15 or 30 years. These have closing costs and take a second lien position on your property.
  • HELOC: A credit line that you use on an as-needed basis for a set amount of time called the draw period — often 10 years. After the draw period, the balance becomes due. You can usually pay it off in a balloon payment or convert it into a term loan that you pay off over 20 years. HELOCs may come with fees and take a second lien position on your property.
  • Cash-out refinance: A new, larger mortgage that replaces your existing one and allows you to cash out the funds left over after paying off your mortgage balance. These have closing costs and take the first lien position on your home. A