How to use a personal loan for debt consolidation

The average American carries more than $6,000 in credit card debt, which is troubling on its own. Add in the fact that the average credit card interest rates currently exceed 20%, and you can see how the current debt landscape is a recipe for disaster. High-interest debt like this can be especially challenging to repay, as it quickly accumulates and makes it harder to pay down the principal.

The combination of high debt levels and sky-high rates can make debt repayment difficult since so much of each monthly payment goes toward interest rather than reducing the principal. This cycle of revolving debt can feel overwhelming, especially for those who are still using credit cards to pay for regular expenses and bills.

This is where debt consolidation comes into the picture. Consolidating debt means rolling multiple high-interest balances like credit cards, medical bills, or personal loans into a single new loan with one monthly payment. By combining several debts into one loan, you can simplify your finances and make debt management easier. The challenge is finding a method that not only simplifies repayment but also saves money on interest.

A personal loan for debt consolidation can offer a clear path forward if consumers meet the income and credit requirements to qualify for the best rates and terms. Unlike credit cards with variable rates and flexible monthly payments, personal loans come with a fixed interest rate, a fixed monthly payment, and a set loan term—the length of time over which the loan is repaid. Personal loans typically offer a variety of loan terms, so you can choose the one that fits your needs. This means you’ll have a fixed payment each month, know exactly how much you owe, and when the loan will be paid off. The annual percentage rate (APR) on your loan will impact the total cost of borrowing, so it’s important to compare APRs when considering your options.

How do debt consolidation loans work?

A personal loan for debt consolidation is a financial tool that’s designed to simplify the debt repayment process. These loans let you borrow a lump sum of money, which is then used to pay off existing balances so you’re left with one monthly payment on the loan itself. By consolidating multiple debts—such as credit card balances, medical bills, and personal loans—into a single loan, you can make budgeting easier and potentially save money on interest if the new loan has a lower rate than you were paying before.

How do debt consolidation loans work? After applying and getting approved, the lender can disburse the funds directly to you or pay your other lenders on your behalf. Either way, funds from the new loan must be used to pay off existing debts. From there, you’ll repay the debt consolidation loan in fixed monthly installments over a set term, which provides predictability and a clear payoff date. The result is that you only have a single loan to manage, rather than juggling payments on multiple debts.

Types of debt that can be consolidated include high-interest credit cards, personal loans, medical bills, and even retail store cards. Consolidating credit card debt is one of the most common reasons people use a debt consolidation loan, as it allows them to combine several credit card balances into one manageable payment. Basic eligibility requirements vary, but lenders usually evaluate your credit score, income, and debt-to-income ratio. A higher credit score and stronger income typically result in a loan offer with superior rates and terms. Lenders may also review your credit report as part of the approval process.

When exploring types of debt consolidation loans, it’s important to understand the difference between secured and unsecured personal loans. Secured loans require collateral, such as a car or savings account, and may offer lower rates but pose a greater risk if you default. Unsecured loans don’t require collateral, making them less risky for borrowers, but are sometimes more expensive.

When your loan is disbursed, keep in mind that loan proceeds may be reduced by origination fees or other charges, which can affect the actual amount you receive.

Key benefits of using personal loans for debt consolidation

Knowing the pros and cons of personal loans for debt consolidation is the best way to find out if one of these loans is right for you. Using a personal loan to consolidate your debts can help you manage debt more effectively by combining multiple payments into one, making it easier to stay on track and improve your financial future. Read on to learn more about personal loans for debt consolidation benefits, including the potential for a lower monthly payment, and how these loans compare to other debt repayment methods.

Simplify your monthly payments

Debt consolidation loans can make managing your finances much easier by combining multiple payments into one. Instead of juggling several credit card bills, medical balances or other loans with different due dates and interest rates, you’ll only have a single monthly payment to track.

Having just one monthly payment to make reduces the risk of missed payments, late fees, and added stress. With one consistent due date and a fixed repayment schedule, debt consolidation loans provide clarity and structure, helping you stay organized while working toward financial stability.

Potentially lower interest rates

According to the Federal Reserve, average credit card interest rates across accounts nationwide are well over 20%. In the meantime, average personal loan rates for 24-month debt consolidation loans are around half of that. By consolidating your debts into a single loan with a lower fixed rate, you can significantly reduce your overall interest payments and the total interest paid over the life of the loan.

This makes credit card consolidation a no-brainer for individuals who have the credit and income to qualify for a loan with the best rates and terms. After all, the best debt consolidation loans come with rates well below 10% and flexible repayment terms that let consumers choose a monthly payment they can afford.

How much could you save with debt consolidation? Imagine you owe $8,000 on a credit card with a 23.00% APR and you’re paying $300 per month. In this case, you would spend 38 months paying off this debt and fork over $3,308.01 in interest over that timeline.

If you were to consolidate with a personal loan that has an interest rate of 8.00% and a 36-month repayment term, you could owe just $250.29 per month and pay just $1,024.87 in interest over that timeline. During the application process, you can quickly check your debt consolidation loan rate, which will help you estimate your potential savings on interest payments.

Fixed repayment schedule

While credit cards let you pay any amount you want each month as long as it’s more than the minimum payment, fixed-rate personal loans come with a set loan term that does not change. Having a set loan term is less flexible overall, but it can help you create a debt payoff timeline that you really have to stick to, and the fixed monthly payment provides predictability and stability.

Personal loan terms typically range from 12 months up to 84 months, so you can also select the loan term and monthly payment amount that works for you. The loan term is the period over which the loan is repaid. Where longer repayment terms lead to paying more interest over time, they come with lower fixed monthly payments. Likewise, shorter repayment terms come with bigger fixed monthly payments and less interest overall.

Potential credit score improvement

If you’re wondering, “Do consolidation loans hurt your credit score?” the answer is both yes and no. The act of applying for a loan may cause a small dip in your score due to the hard inquiry required to apply. However, paying off high-interest credit cards over time will ultimately lower your credit utilization ratio, which boosts your score. Consistently making on-time payments also strengthens your credit history, so this is another area where debt consolidation loans can actually help.

With patience, a personal loan’s credit score benefits often outweigh the short-term impact. However, the best results go to those who always make monthly payments on time and avoid getting back into more debt.

Peace of mind and reduced financial stress

Consolidating debt with a personal loan offers more than just financial relief – these loans can significantly help manage and reduce stress. By combining multiple bills into a single new loan, you simplify your finances and reduce the chaos involved in juggling multiple credit card and loan bills each month.

Knowing you have a clear plan with predictable payments can also improve overall financial well-being and give you a sense of control and confidence. Additionally, consolidating debt with a personal loan can help you pay off your debt sooner, improving your overall financial outlook.

Potential drawbacks of using a personal loan for debt consolidation

While a low-interest-rate debt consolidation loan offers a range of potential benefits, it also has some downsides to be aware of. Your existing debt can impact your eligibility and the rates you receive. These can include, but are not limited to, the possibility of hidden fees, prepayment penalties, and the risk of accumulating new debt.

Origination fees and costs

While the best personal loans for debt consolidation don’t charge any fees you cannot avoid, some personal loans come with an origination fee as high as 10% of the loan amount. This origination fee is typically deducted from your loan proceeds, reducing the amount you actually receive when you borrow to consolidate debt, and thus increasing your costs. Both your interest rate and fees will affect the total cost of the loan. Other personal loan fees to look out for include application fees and early repayment fees, although these are much rarer.

To get the best debt consolidation deal you possibly can, look for personal loans that come without origination fees and all other fees you can’t avoid paying.

Risk of accumulating new debt

Paying off old credit cards with a personal loan can also leave you with renewed credit limits you may be tempted to spend. If you’re not careful, you can wind up with more credit card debt and a new debt consolidation loan to pay off at the same time.

If your goal is avoiding debt after consolidation, you should do everything you can to stop using credit cards altogether. This could mean cutting your cards up or storing them away for safekeeping. No matter what it takes, you need to avoid falling back into the old habits that got you into debt in the first place.

Secured vs. unsecured loan considerations

There are two main types of debt consolidation loans: secured loans and unsecured personal loans for debt consolidation. A secured loan requires collateral that can be seized if you don’t repay, while an unsecured personal loan does not require any collateral. Additionally, a home equity loan can also be used to consolidate large amounts of debt, offering another option for borrowers looking to simplify their finances.

There are pros and cons with each type of loan, and having an understanding of secured vs. unsecured debt consolidation options is the best way to decide. The chart below shows how each of these loans works and how they might benefit you.

How to qualify for a personal loan for debt consolidation

Hoping to qualify for a debt consolidation loan? Meeting the following criteria can help. Credit approval and loan approval are key steps in the application process, as the financial institution will review your eligibility before granting access to funds. Personal loan customers may benefit from faster funding and tailored borrowing options when they meet the lender’s requirements.

Credit score requirements

While most lenders prefer applicants with good credit or better (FICO scores of 670+), some lenders offer debt consolidation loans for bad credit. Not surprisingly, individuals with higher credit scores tend to qualify for loans with the best rates and terms, whereas those with poor credit pay significantly higher rates. As part of the application process, lenders will review your credit report to assess your credit history and overall creditworthiness.

If you’re hoping to have a better credit score before applying for a debt consolidation loan, paying off unsecured debt to reduce your credit utilization ratio can help. Since your payment history is the most important factor that impacts credit scores, you’ll also want to make sure every bill you have is paid early or on time.

Income and employment verification

Debt consolidation companies also want to know you can afford to repay the money you borrow, especially if you’re taking out an unsecured debt consolidation loan. They do this by asking about your income and verifying when you receive it.

Most debt consolidation companies will ask for proof of income and employment in the form of pay stubs or tax returns. You may also have to provide bank statements that show your reported income is regularly hitting your account, especially if you’re self-employed. Lenders may also require a bank account to verify your income and to transfer funds quickly once you are approved.

Debt-to-income ratio

Lenders also want to make sure you don’t have an overwhelming amount of other debt, and they do this by measuring your debt-to-income (DTI) ratio. True to its name, this ratio compares how much you owe in monthly bills to your gross monthly income.

According to Discover, most lenders want to see personal loan applicants with a debt-to-income ratio below 36%.

Step-by-step process to get a personal loan for debt consolidation

Once you’re ready to tackle debt with a personal loan, these important steps can get you to the finish line. Keep in mind that lenders may have a minimum loan amount or minimum loan requirement, so be sure to check if your desired loan fits within their range.

When reviewing loan features, look for options to set up automatic payment, which may qualify you for an interest rate discount and make managing your loan easier.

Step 1: Assess your debts

Before you figure out how to get a personal loan for debt consolidation, you need to know how much debt you have – and how much debt you need to consolidate. We recommend making a list of all debts you have using pen and paper, including credit card debt, medical bills, personal loan bills, and other debts. If you have multiple debts, consider how consolidating them can make repayment easier and more manageable. Add the interest rate you’re currently paying next to each debt, then total the amount up.

Once you know how much you currently owe, you can calculate debt consolidation needs and look for personal loan companies that might lend you that amount.

Step 2: Research and compare lenders

The best debt consolidation loans can come from online banks, traditional banks, and credit unions, and you may want to compare options from all of the above. When comparing lenders, keep in mind that a credit union may offer specialized debt consolidation loan programs with competitive rates, lower fees, and member-focused benefits. Factors to compare across lenders include interest rates, available repayment terms, loan fees, including origination fees, and potential discounts you can qualify for (including discounts for autopay).

Also, look for lenders that let you “check your rate” and gauge your approval odds without a hard inquiry on your credit reports.

Step 3: Apply and complete the process

While the steps to apply are unique across different personal loan companies, most make it easy to apply for funding online in a matter of minutes. Some can also fund your loan within one to two business days after you apply, which is an important consideration if you want to consolidate debt quickly. Compared to a balance transfer, which can temporarily reduce interest rates on credit card debt but may have caps and higher rates after an introductory period, a personal loan can offer fixed payments and terms for debt consolidation.

Once you’re approved for a loan, the lender might send the funds directly to your creditors. They might also send the money to you so you can pay off existing debts yourself.

In either scenario, you’ll want to make sure the personal loan funds go directly to your existing debts so they are paid off completely. From there, you’ll pick up with repayment on your new debt consolidation loan based on the terms you agreed to.

Best personal loan rates

Frequently asked questions about using personal loans for debt consolidation