Debt consolidation loans allow you to merge multiple debts into one balance. They can streamline your debt payments and help save money if you qualify for a lower rate.
However, these loans aren’t for everyone. They are most effective for individuals who are open to changing their spending habits to avoid falling into a cycle of debt again. Keep reading to learn more about how debt consolidation loans work and when it could make sense to apply for one.
[Read: Best Debt Consolidation Loans.]
What Is a Debt Consolidation Loan?
A debt consolidation loan is usually a personal loan that is used to pay off other debts, such as credit cards or other loans. Using a debt consolidation loan allows you to combine multiple debts into a single debt, usually with a fixed rate and term.
Borrowers often use debt consolidation loans to consolidate high-interest debt because they typically have lower average rates. For example, in the first quarter of 2025, the average 24-month personal loan rate was 11.66%, according to the Federal Reserve. By comparison, during the same period, the average rate for credit cards assessed interest was 21.91%.
How Do Debt Consolidation Loans Work?
When you consolidate high-interest debt with a personal loan that has a lower rate, you can save a considerable amount of money. For example, let’s say you want to consolidate two credit cards. Your balance on the first card is $5,000 at 18.9%, while your balance on the other card is $10,000 at 22%. If you continue to make minimum payments only: However, if you took out a $15,000, 5-year loan at 14% to pay off both cards, your monthly payments would be fixed, come in about $250 cheaper, and you’d save over $5,440 in interest.
When It’s a Good Idea to Use a Debt Consolidation Loan
Taking out a debt consolidation loan can make sense in several situations:
— You qualify for a lower rate. If you can qualify for a lower rate, you could save thousands over the life of the new debt consolidation loan.
— You have exhausted other options. A debt consolidation loan could also be useful if you’ve exhausted all repayment options, such as talking to creditors to lower payments and interest rates, says Edna Forero, a chartered financial consultant and accredited financial counselor based in Jupiter, Florida.
— You understand where your money is going. Forero says a debt consolidation loan could make sense if you have thoroughly reviewed your budget to understand where you are spending money and have looked for ways to reduce your expenses.
[Read: Best Balance Transfer Credit Cards.]
When It’s a Bad Idea to Use a Debt Consolidation Loan
On the flip side, there are many situations where taking out a debt consolidation loan isn’t the best idea:
— You don’t qualify for a lower rate. If you can’t secure a lower rate, it might not make financial sense to take out a debt consolidation loan because you won’t save money.
— You don’t intend to change your financial behavior. Forero says that taking out a debt consolidation loan doesn’t make sense if you don’t plan on changing your financial behavior and will continue using credit cards daily.
— You’ve been relying on credit to support your lifestyle. Taking out a debt consolidation loan also isn’t a good idea if you’ve been using credit cards to survive or maintain your lifestyle and haven’t increased your income to keep up with payments, says Forero.
How to Get a Debt Consolidation Loan
Take the following steps to get a debt consolidation loan:
1. Add up the debt you want to consolidate. Review your debts and figure out how much money to request from a lender.
2. Shop around. Compare rates and terms from several lenders. If possible, prequalify for a personal loan so you can see the terms and rate you’d receive without affecting your credit.
3. Submit a complete loan application. Once you’ve chosen a lender, submit a formal loan application.
4. Repay the loan as promised. Make consistent on-time payments to avoid damaging your credit.
[SEE: Best Home Equity Loans]
Debt Consolidation Loan Alternatives
If a debt consolidation loan isn’t right for you, there are other options to consider.
Balance Transfer Credit Cards
Consolidating debt with a balance transfer credit card may be a better than taking out a debt consolidation loan, especially if you can qualify for a promotional 0% APR. “Payments go directly to the principal for a period of time, which can save a tremendous amount of money from interest,” says Shawn Perkins, a certified financial planner and founder of Genuine Wealth Solutions. However, once the promotional window ends, you’ll have to pay interest on any remaining balance at the card’s standard rate.
Home Equity Loan or Line of Credit
If you’re a homeowner, tapping your home’s equity with a home equity loan or line of credit
could make sense. These often have lower interest rates than personal loans. However, a major downside is that if you default on the loan, a lender can take your home.
401(k) or Retirement Loan
“In very severe cases, a loan against an employer retirement plan could also be an option,” says Perkins. “Loans can be made for up to 5 years (longer if used for buying a home) and fixed interest rate is paid back to the investment account versus paid to a lender.” However, Perkins warns that this option comes with significant risks and you should only use it as a last resort.
[READ Best HELOC Lenders]
The Bottom Line
“Debt consolidation loans can be a great option to lower monthly payments and chip away at outstanding high-interest debt, but it shouldn’t be the first lever to pull,” says Perkins. “The first step is to have a clear understanding of spending habits and to take very intentional and sometimes drastic steps to change an over-extended lifestyle.”
Before you take out a debt consolidation loan, weigh the pros against the cons and explore alternatives. If you need help deciding what’s the best route to tackle debt, consider contacting a certified debt professional.
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How to Consolidate Debt originally appeared on usnews.com
Update 06/02/25: This story was previously published at an earlier date and has been updated with new information.
