What is a Debt Consolidation Loan?

Debt consolidation loans allow borrowers to roll multiple debts into a single new one with fixed monthly payments and, ideally, a lower interest rate.

With a debt consolidation loan, a lender issues a single personal loan that you use to pay off other debts, such as balances on high-interest credit cards. You’ll pay fixed, monthly installments to the lender for a set time period, typically two to five years. The interest rate depends on your credit profile, and it usually doesn’t change during the life of the loan.

Debt consolidation is only one of several strategies for paying off debt. Debt consolidation won’t work if you have too much debt or haven’t fixed underlying spending issues.

What rate should I expect?

Rates vary from lender to lender and depend heavily on your credit history and ability to repay, but here is what interest rates on personal loans look like, on average:

How’s your credit? Score range Estimated APR
Source: lender survey
Excellent 720 – 850 13.9%
Good 690 – 719 18.0%
Average 630 – 689 21.8%
Bad 300 – 629 27.2%; lowest scores unlikely to qualify

What are the requirements for debt consolidation?

Almost all lenders require you to be 18 years or older and a legal U.S. resident with a verifiable bank account and not in bankruptcy or foreclosure.

Borrowers with excellent credit and low debt-to-income ratios may qualify for interest rates at the low end of lenders’ ranges. Someone with poor or average credit may be able to get an unsecured personal loan on the strength of a steady income and low debt levels, but should expect rates toward the higher end of the range — up to 36%. Other options for borrowers with bad credit include secured or co-sign personal loans.

Some lenders say they have no minimum credit score requirements, but that does not mean they don’t check your credit report. Knowing your credit profile before you apply can help set expectations. Several personal finance websites offer free access to your credit score and credit report. Look for a site that offers educational tools such as a credit score simulator or guidance on how to build credit.

If you can’t qualify for a loan through a reputable lender, don’t head for a payday lender. Consider these options first.


Debt consolidation vs. balance transfer card

For borrowers with good credit, a balance transfer credit card is an alternative to a debt consolidation loan. Such cards have an introductory 0% interest rate, which increases after a promotional period, usually no more than 21 months.

The amount of credit card debt you can transfer is typically up to $15,000. Once the introductory period expires, the rate on a balance transfer card is usually higher than on a personal loan. In addition to paying off your balance before the rate increases, you’ll want to avoid making further charges.

A personal loan offers some advantages over balance transfer cards. Fixed payments ensure you’ll pay off debt on a set schedule. Borrowing limits are typically higher; some lenders offer loans of $50,000 or more.

In addition, a personal loan may improve your credit if it means your credit card balances shrink relative to the credit limits. Your credit scores can take a hit if you use all or most of the available credit on your cards. A personal loan balance is reported as installment debt, which is treated differently in credit scoring formulas than revolving debt such as credit cards.


Additional steps toward financial health

If you’re borrowing money to pay off debt, a personal loan works best if you have a plan to tackle your debts. Creating a budget and starting a savings habit are small steps that could build a stronger financial future.

If you don’t have an immediate need for cash, work on building your credit score. A higher score will qualify you for more loan opportunities, lower interest rates and better loan terms in the future.

Don’t know your credit score? Several personal finance websites offer a free credit score. Look for a site the offers educational tools such as a credit score simulator plus access to your credit report.