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Debt Management

What is a Debt Consolidation Loan and Is It Right for You?

A debt consolidation loan is a new loan — usually an unsecured personal loan — that you use to pay off several existing debts, leaving you with one fixed monthly payment. It can save money if the new APR is lower than your current debts and you avoid building new balances.

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How the process works

  1. You add up the debts you want to consolidate, typically credit cards or other high-rate balances.
  2. You apply for a loan large enough to cover them. Many lenders let you check estimated rates with a soft credit inquiry first.
  3. If approved, the lender either pays your creditors directly or deposits the money for you to pay them.
  4. You repay the new loan in fixed monthly installments over a set term, often two to seven years.

Potential benefits

  • One payment instead of several due dates.
  • A fixed rate and end date, unlike revolving credit card debt.
  • Possible interest savings if your new APR is lower than your current weighted rate.
  • Possible credit score improvement over time, as card utilization falls and you pay on time.

Drawbacks and risks

  • Origination fees — some lenders deduct a fee from the loan amount, which raises your true cost.
  • A longer term can cost more even at a lower rate, because you pay interest for more months.
  • It doesn't fix spending habits. If you run your cards back up, you'll have more debt than before.
  • Approval and rates depend on credit. With fair or poor credit, the offered APR may not beat what you pay now.

How to decide

Ask yourself:

  • Is the new APR, including fees, clearly lower than what I pay today?
  • Can I afford the new monthly payment comfortably?
  • Have I made a plan — and a budget — to avoid new card balances?
  • Would a balance transfer card or a nonprofit debt management plan be a better fit?

If you can answer yes to the first three, consolidation may be worth exploring. Our Loan Comparison Tool helps you compare offers you've received by total cost, and our page on what to look for in consolidation lenders lists the questions to ask.

Alternatives to consider

  • Paying down debt with the snowball or avalanche method — see The Ultimate Guide to Debt Management.
  • Asking current creditors for a lower rate or hardship program.
  • Credit counseling through a reputable nonprofit agency.

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