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Should You Get a Debt Consolidation Loan?

It can be a useful and powerful tool to organize your debt, ideally at a lower interest rate, but it’s not always the best option.

Written by Devon Delfino / September 12, 2022

Quick Bites

  • Debt consolidation loans can help you save money while paying off high interest debt.
  • These loans combine existing debts, and they can come in many forms.
  • You need to make sure the rate is lower than your current interest rates, or it might not be worth it.
  • There are various pros and cons to this product. You’ll need to weigh those factors to see if it’s worth getting for your circumstances.

When you’re deep in debt, it can be hard to see the way out of it. And if you see yourself being in debt for a long time, keeping yourself to a specific payoff schedule can be difficult. Especially if your interest rates are particularly high. That’s where a debt consolidation loan can come in handy.

Here’s what you should know about this product to decide if it’s right for you.

Inside this article

  1. What is a consolidation loan?
  2. When it makes sense
  3. Debt consolidation options
  4. Pros, cons of debt consolidation

What is a debt consolidation loan?

A debt consolidation loan is a loan you take out to pay off existing debt, like credit card debt.[1]

“People would consider getting a debt consolidation loan if they have a lot of high-interest debt that they can’t see themselves paying off within the next twelve months,” says LaToria Stewart, a certified financial education instructor and owner of The Ultimate Financial Boutique.

Here’s how the debt-consolidation loan process generally works if you opt for a personal loan[2]:

  1. You apply for a debt consolidation loan and provide basic financial details like your income, address, job and employment. You’ll also state how much money you need. You may see tentative loan offers during this step, too.

  2. The lender evaluates your application based on the information you provide as well as your credit profile, which includes your score and history.

  3. If approved, the lender will send you an offer, including the interest rate (depending on the loan, it may be fixed or variable), any applicable fees (like origination and late fees), the loan term and your monthly payment amount.

  4. If you want it, you’d accept the loan and sign the loan documents.

After that, you’d receive the loan funds directly to an account of your choice, and you’d be able to use that money to pay off specific lenders or credit card companies—some lenders offer to pay your creditors directly. 

After consolidation, instead of paying multiple banks and lenders, you’d only have to make one payment to your new debt consolidation lender.[3]

When does it make sense to consolidate debt?

As Stewart notes, you want to make sure that your debt consolidation loan provides a lower interest rate than your current rates, and that you have enough debt to justify taking out the loan. That means you shouldn’t be able to pay it off in the next year, she says.

And of course, you have to qualify to get a debt consolidation loan in the first place. Stewart suggests having a credit score of at least 675 to ensure you qualify. But, generally, the higher your score, the better the rate you’ll be able to access.

Tip

You are entitled to get a free credit report each year, and the three credit bureaus are offering free weekly credit reports through the pandemic. You can get your report through AnnualCreditReport.com.

It’s also important to note that just because you get an offer, it doesn’t mean that a debt consolidation loan is a good idea.

“When you have a lot of credit card debt, you’re going to get a lot of offers on debt consolidation,” says Stewart. “But you have to keep in mind, if your credit score is poor, your interest rate won’t be as good as if you have a higher score.

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Debt Consolidation with Bad Credit: What You Need to Know

If you have a low credit score, debt consolidation will be tricky. But it can be done with the right approach.

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Another key consideration is that a debt consolidation loan might give you the opportunity to charge things to your credit cards again. So it’s important to keep the mindset of paying off debt when you take out one of these loans, otherwise you could end up with even more debt.[1]

How to Consolidate Credit Card Debt

How to Consolidate Credit Card Debt

You can pay off the plastic in your wallet using funds from a balance transfer card, personal loan or other means. But which is best for you?

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Debt consolidation options

There are a couple of options for consolidating your debt via a loan:

Personal loan: A personal loan doesn’t have to be used just for debt consolidation. So, in theory, you could request more than your current debts. So if you have a large upcoming expense, like house repairs, that may make more sense than a debt consolidation loan.

Credit card debt consolidation loan: This type of loan is based specifically on the amounts of the debts you want to consolidate. So there’s less flexibility than a personal loan, but for someone who just wants to get out of credit card debt, it can be a solid option.

Here are some of the highest-rated personal loan companies that Sound Dollar has independently reviewed:

Company
SoFi personal loans logoVisit
Winner
Winner
Best overall
APRs*
APRs*
7.99% - 23.43%
Minimum credit score
Minimum credit score
680
Visit
Winner
Winner
Editor's pick
APRs*
APRs*
6.74% - 17.99%
Minimum credit score
Minimum credit score
650
Winner
Winner
Best for fair credit
APRs*
APRs*
5.99% - 24.99%
Minimum credit score
Minimum credit score
600
Winner
Winner
Best for good credit
APRs*
APRs*
3.99% - 19.99%
Minimum credit score
Minimum credit score
Not stated
Winner
Winner
Best for debt consolidation
APRs*
APRs*
6.99% - 19.99%
Minimum credit score
Minimum credit score
Not stated

Similar to credit card debt consolidation loans, another option is using a balance transfer card to consolidate existing credit card debt — though it isn’t a loan, per se. This would require you to open a new credit card account, and it may provide rates as low as 0% for a set amount of time.[4]

How to Pay Off Credit Card Debt in 6 Easy Steps

How to Pay Off Credit Card Debt in 6 Easy Steps

Don’t lose hope if you’re mired in credit card debt. Follow these steps to get a handle on things and become debt-free.

Find out more

Pros and cons of debt consolidation loans

If you aren’t sure if it’s a good idea to consolidate your debt, it can help to look at the pros and cons[1, 3, 5]:

Pros

  • Can help you save money while paying off your debt
  • Ability to combine multiple types of debt, including credit cards, installment loans and bills
  • Unlike credit cards, the interest rates may be fixed
  • More convenient since you only need to make one monthly payment

Cons

  • Some loans may come with a low “teaser” APR that ends after a certain amount of time
  • You may have to pay fees, like an origination fee, which could add to your long-term costs
  • May increase your debt payoff timeline, depending on the term you choose

If you’re considering a debt consolidation loan, it’s important to shop around to find the best deal, says Stewart, adding “Make sure to get prequalification. It’s a soft credit pull and that’s not going to impact your credit.” That way, you’ll be able to see if you’re likely to qualify without going through the application process.

After gathering quotes from personal loan companies that offer prequalification, calculate your potential savings using a debt consolidation loan calculator, like this one from Calculator.net.

And if a debt consolidation isn’t right for your situation, consider other ways of paying off debt.

Article Sources
  1. “What do I need to know if I’m thinking about consolidating my credit card debt?” Consumer Financial Protection Bureau, June 7, 2017, https://www.consumerfinance.gov/ask-cfpb/what-do-i-need-to-know-if-im-thinking-about-consolidating-my-credit-card-debt-en-1861/.
  2. “How Our Personal Loans Process Works,” Rocket Loans, https://www.rocketloans.com/personal-loans.
  3. “Personal Loans for Debt Consolidation,” Marcus by Goldman Sachs, https://www.marcus.com/us/en/debt-consolidation-loans.
  4. “Personal Loan vs. Debt Consolidation Loan,” Navy Federal Credit Union, June 1, 2022, https://www.navyfederal.org/resources/articles/personal-finance/personal-loan-vs-debt-consolidation.html.​​
  5. “Simplify your finances with a debt consolidation loan,” OneMain Financial, https://www.onemainfinancial.com/personal-loans/debt-consolidation.

About the Author

Devon Delfino

Devon Delfino

Devon Delfino is a writer who’s covered personal finance—including everything from student loans to budgeting to saving for retirement and beyond—for the past six years. Her financial reporting has appeared in publications like the L.A. Times, U.S. News and World Report, Teen Vogue, Masha

Full bio

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