Key takeaways
- A consolidation loan pays off several debts so you have one loan and one payment.
- It helps most when the new rate is lower than what you pay now and you stop adding new debt.
- A lower monthly payment can still cost more overall if the loan term is longer.
- Using your home as collateral puts your home at risk.
- Some “consolidation” ads come from debt settlement companies. Read carefully.
A debt consolidation loan is one of the most straightforward ways to simplify credit card debt. Instead of juggling several cards with different due dates and rates, you take out one loan, pay off the cards, and make one fixed payment until the loan is gone. It sounds simple, and it can be, as long as the numbers work and the cards stay paid off.
How it works
- You apply for a loan, usually a personal loan from a bank, credit union or online lender.
- The loan pays off your other debts, either directly or by depositing money you use to pay them.
- You repay the loan in fixed monthly payments over a set term, often a few years.
According to the CFPB, these loans convert many debts into one loan payment. You still owe the full amount. The goal is a lower rate, a simpler payment and a clear end date.
Who usually qualifies
Lenders look at your credit history, income and existing debts. In general, you’re more likely to qualify for a rate that actually helps if you:
- Have steady income.
- Have fair to good credit, with few recent late payments.
- Don’t already owe too much compared with your income.
If you’re already behind on several debts, you may not qualify, or the rate offered may be too high to help.
How to compare offers
| What to check | Why it matters |
|---|---|
| APR | Includes interest and some fees. Compare it with the rates on your current debts. |
| Origination fee | Often taken out of the loan, so you may get less than you borrow. |
| Loan term | Longer terms lower the payment but can raise the total cost. |
| Monthly payment | Must fit your budget every month. |
| Total cost | Payment × number of months. Compare it with what you’d pay on your current plan. |
Many lenders let you check your rate with a soft credit check, which doesn’t affect your score. A full application usually adds a hard inquiry.
The risks
Paying more over a longer time
The CFPB points out that a lower monthly payment may simply come from stretching the loan over a longer time, which can mean paying a lot more overall, including fees.
Running the cards back up
After consolidation, your cards have zero balances. If spending doesn’t change, they can fill up again, and you end up with the loan and new card debt.
Home equity loans
Some people use a home equity loan or line of credit to consolidate. The CFPB warns that if you don’t pay it back, you could lose your home to foreclosure, and you may pay closing costs. That turns unsecured card debt into debt secured by your house.
Ads that aren’t what they seem
The CFPB also warns that many companies advertising “consolidation” are actually debt settlement companies, which often charge fees. A consolidation loan comes from a lender, and you repay it in full. If a company talks about stopping payments or negotiating your balances, it’s offering settlement. See what is debt settlement.
How it affects your credit
Applying adds a hard inquiry and a new account, which can cause a small, short dip. Paying off your cards lowers your credit utilization, which can help. On-time loan payments build your history over time. Read how debt relief affects your credit score.
Alternatives
- A balance transfer card, if you can pay off the balance during the promotional period.
- A debt management plan through a nonprofit credit counselor, which doesn’t require good credit.
- A payoff plan with the debt avalanche or snowball.
- Debt settlement or bankruptcy if repaying the full amount isn’t realistic. Compare them in debt settlement vs. debt consolidation.
The bottom line
A consolidation loan works when it lowers your rate, fits your budget and comes with a firm commitment to keep the cards paid off. Compare the total cost, not just the monthly payment, and be wary of anyone who calls settlement “consolidation.” A nonprofit credit counselor through the NFCC can help you run the numbers for free or a small fee.
Sources: CFPB: consolidating credit card debt · CFPB: credit counseling, debt settlement, consolidation and credit repair · NFCC