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J.J. Starr is an insurance and personal finance expert who has been writing for Compare.com since 2022. Her work has been published across the web, appearing on sites such as Insurify.
Prior to writing for Compare.com, J.J. was a registered banker and life insurance consultant, holding a Series 6, FINRA, and life insurance license. She also earned a master’s degree in writing from New York University.
J.J. has a passion for helping people save money by explaining complex topics like car insurance in a way that is simple and easy to understand.
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Nick Versaw leads Compare.com's editorial department, where he and his team specialize in crafting helpful, easy-to-understand content about car insurance and other related topics. With nearly a decade of experience writing and editing insurance and personal finance articles, his work has helped readers discover substantial savings on necessary expenses, including insurance, transportation, health care, and more. As an award-winning writer, Nick has seen his work published in countless renowned publications, such as the Washington Post, Los Angeles Times, and U.S. News & World Report. He graduated with Latin honors from Virginia Commonwealth University, where he earned his Bachelor's Degree in Digital Journalism.
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Licensed property and casualty insurance agent
NPN: 21630969
MacK Korris is a licensed insurance agent who reviews and fact-checks articles for Compare.com. MacK has several years of experience reviewing and editing a variety of insurance topics, and he also holds valid insurance producer licenses in property and casualty lines from the Missouri Department of Commerce and Insurance (NPN #21630969).
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Debt consolidation loans combine more than one outstanding debts into one loan with a single monthly payment. They can help you manage high-interest or variable-rate debts, like credit cards.
Consolidating into a personal loan with lower, fixed loan rates can reduce total costs. But it also comes with origination fees and potential prepayment penalties.
The goal is to make debt easier and potentially cheaper to repay. And considering a consolidation loan — even if you decide another option is a better fit — is a step in the right direction.
In this guide, you’ll learn how consolidation works, its pros and cons, and alternatives to consider.
Debt consolidation reorganizes debt, but it won’t eliminate it.
Borrowers with good credit and a steady income will benefit most from debt consolidation.
Debt consolidation can come with longer repayment terms and fees, which can increase your total debt, especially if your spending habits don’t change.
A debt consolidation loan combines all your current debts into one loan with a single monthly payment.[1] The lender directly pays off your outstanding debts, and you repay the lender over time.
Importantly, the new loan doesn’t erase your debt. Instead, it simply transfers the debt to another lender, which can simplify your finances. Often, you can also negotiate for a lower and fixed interest rate, especially when consolidating variable-rate debt instruments like credit cards to a fixed interest loan.
Here’s how the process works:
Apply for a debt consolidation loan. Submit a personal loan application with a bank, credit union, or other financial institution. The lender reviews your credit, income, and current debts to determine your loan eligibility, how much you can borrow, and your interest rate.
Use the loan to pay off existing debts. After approval, the lender usually sends money directly to your creditors. But sometimes lenders will send you a check to distribute to lenders yourself.
Repay the loan in installments. Going forward, you’ll make one monthly payment to your new lender until you fully repay the loan.
Keep in mind that some financial institutions will offer “teaser rates,” which are initially low interest rates that last for a short period of time.[2] Afterward, interest rates can rise considerably, so it’s a good idea to always read the disclosures.
Pay off high-interest debt sooner with a personal loan.
You can use several financial products for debt consolidation, including personal loans, home equity loans, balance transfer credit cards, and loans from certain retirement savings accounts. Each option works differently and comes with different borrowing limits, credit requirements, interest rates, and trade-offs.
Understanding how these options work is key to knowing which is best for your situation. Here’s an overview of how different debt consolidation options compare.
Debt Consolidation Option  | Typical Borrowing Limit | Typical Credit Score Needed | Typical APR | Key Trade-off |
|---|---|---|---|---|
| Unsecured personal loan | $2,000 with borrowing caps of $50,000 to $100,000, depending on the lender | 580 minimum, though some lenders require higher scores | 6.2%–36% | Lower credit scores may mean high rates |
| Home equity line of credit (HELOC) or secured personal loan | $5,000 and typically up to 85% of your home’s value minus the remaining balance on your mortgage | 620, higher with some lenders | 5.8% to 10.9% | Variable interest rates, risk of reposession |
| 401(k) loan | Up to 50% of your vested balance or $50,000, whichever is less 3 | Usually doesn’t require a credit check | Usually the prime rate plus 1% to 2% | Potential tax penalties if you switch jobs |
| Balance transfer credit cards | Depends on your income and credit score | Fair or average credit, typically 670 or better | 0% introductory rate with a higher, variable rate after this period ends | High interest rates after introductory period |
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Lenders review several financial factors when deciding to approve or deny a debt consolidation loan application. Your credit history is one of the most important parts, as it helps lenders determine how likely you are to repay the loan.
Here’s an overview of the three most important factors for determining your creditworthiness, approval odds, and the terms of your loan.
Credit score: Your credit score shows how you’ve handled your debt in the past. Lenders usually require fair to good minimum credit scores, or 580 to 670. Usually, the higher your score, the better the loan terms. Review your credit report before applying.
Debt-to-income ratio (DTI): Your DTI measures how much of your income goes toward debt payments. A lower DTI signals that you have enough income to repay your loan.
Income history: Lenders require proof of income and a strong income history to confirm that you can repay your loan. You’ll typically need to share pay stubs, tax returns, or bank statements as part of the application and approval process.
If you don’t meet the lender’s minimum credit and income requirements, you may be able to get a loan by applying with a qualified cosigner or securing your loan with collateral.
See rates and offers from top-rated lenders.
Debt consolidation loans offer several advantages, but they also come with important drawbacks. Most importantly, if overspending caused your debt, consolidation won’t fix that.
Here are the most important benefits and drawbacks of consolidation.
Simple payment structure: Debt consolidation means you get to manage one monthly loan payment amount instead of several.
Potentially lower interest rates: If you have good credit and a strong income, you may get a more favorable annual percentage rate (APR).
Fixed repayment schedule: If you get a fixed-rate loan with set repayment terms, you’ll have predictable monthly payments.
Opportunity to improve credit: Paying off credit cards can lower your credit utilization ratio, which can improve your credit score.
Risk of higher overall costs: Consolidation loans don’t always save money in the long run — especially if they have high, variable interest rates or prepayment penalties.
Doesn’t eliminate debt: You still have to pay off your debt, and your balances may initially increase if your lender charges origination fees or similar.
Qualification requirements: Lenders typically require you to meet minimum qualifications to get a loan with favorable loan terms.
Temptation to accumulate debt: If you continue to use credit cards after consolidation, you may end up with even higher credit card balances, making it more difficult to pay off debt.
It depends. Applying for most debt consolidation loans, whether a personal loan or a credit card, typically triggers a hard credit inquiry. This can cause a small, temporary drop in your credit score.
That said, when done correctly, debt consolidation can improve your credit over time, especially if you pay off credit cards and refrain from putting new balances on them. In effect, you’ll lower your credit utilization ratio, which usually increases your score.
Your new loan could lower your interest rate, saving you money and making debt easier to manage. And if you make on-time loan payments every month, your improved payment history could also help improve your credit score.[3]
The most important thing to remember is to avoid new debt.
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Debt consolidation loans aren’t for everyone, and several alternatives exist as a last resort.
Debt management plans (DMPs): A nonprofit debt counseling organization works with creditors to develop a repayment plan. You deposit money with the counselor, who then uses it to pay your bills. While DMPs don’t directly harm credit, closing accounts may drop your score.
Debt settlement: A for-profit debt settlement company renegotiates your loan balances, usually closing accounts in the process. It typically negatively affects credit. Beware of organizations charging up-front fees.[4]
Credit counseling: Usually nonprofit, counseling agencies advise on debt and financial management and set up payment plans. This can sometimes lengthen repayment periods and reduce interest. Credit should improve as debts shrink, but longer payback may increase total interest costs.
Bankruptcy: A formal legal procedure, bankruptcy releases a debtor from their obligations. But it remains on your credit for up to 10 years and will significantly affect your credit and borrowing opportunities during this period.
Debt consolidation is tricky. Here are some easy answers to the most common questions people ask when considering to consolidate debt.
Credit score requirements depend on the lender and the type of loan. Some lenders require a minimum credit score of 580 for some types of consolidation loans. Other lenders require higher minimums, around 670.
That depends on the interest rate and the length of the loan. For example, a 10-year loan at 10% interest will cost around $661 per month, while a five-year loan at 8% interest will cost about $1,014 per month.
Your interest rate will play a big role, but the best way to pay off a loan amount of $30,000 in two years is to make extra payments (more than the minimum payment) if you can afford it. Strict personal budgeting and negotiating with your creditor can help significantly.
It can be, depending on your financial situation. If you qualify for a significantly lower interest rate, you can save money. But consolidation works best when paired with consistent budgeting and avoiding new debt.
While debt settlement can reduce the total amount you owe, it usually damages your credit significantly and for a long period of time. Generally, you should only do so as a last resort.
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J.J. Starr is an insurance and personal finance expert who has been writing for Compare.com since 2022. Her work has been published across the web, appearing on sites such as Insurify.
Prior to writing for Compare.com, J.J. was a registered banker and life insurance consultant, holding a Series 6, FINRA, and life insurance license. She also earned a master’s degree in writing from New York University.
J.J. has a passion for helping people save money by explaining complex topics like car insurance in a way that is simple and easy to understand.
Nick Versaw leads Compare.com's editorial department, where he and his team specialize in crafting helpful, easy-to-understand content about car insurance and other related topics. With nearly a decade of experience writing and editing insurance and personal finance articles, his work has helped readers discover substantial savings on necessary expenses, including insurance, transportation, health care, and more. As an award-winning writer, Nick has seen his work published in countless renowned publications, such as the Washington Post, Los Angeles Times, and U.S. News & World Report. He graduated with Latin honors from Virginia Commonwealth University, where he earned his Bachelor's Degree in Digital Journalism.
Licensed property and casualty insurance agent
NPN: 21630969
MacK Korris is a licensed insurance agent who reviews and fact-checks articles for Compare.com. MacK has several years of experience reviewing and editing a variety of insurance topics, and he also holds valid insurance producer licenses in property and casualty lines from the Missouri Department of Commerce and Insurance (NPN #21630969).
