The Guide to Debt Consolidation

If you’re struggling to pay off high-interest debt or need an easy-to-understand debt payoff plan, debt consolidation can be excellent.

Consolidating your debt can help you get a smaller monthly payment and become debt-free sooner. There are several ways to improve your finances through debt consolidation.

This guide can help you refinance your debt and have more disposable income.

What is Debt Consolidation?

Debt consolidation is when you combine at least one loan or credit card into a single loan. Doing so gives you a new interest rate, repayment schedule, and monthly payment.

Typically, your new loan has a lower interest rate, a smaller monthly payment, or both.

You may also get a lower monthly payment without getting a lower interest rate by extending your repayment period.

This second situation isn’t the ideal outcome of debt consolidation as your total borrowing costs will likely increase. It can mean the difference between defaulting on your financial obligations and being able to afford your essential bills.

Benefits of Debt Consolidation

Here are some of the best reasons to pursue debt consolidation

Consolidated payments

Instead of having multiple monthly debt payments, you can potentially have a single payment. Having fewer due dates reduces the chance of missing a payment.

It can also be easier to know exactly how much money you need to set aside for debt payments. For example, having a single charge of $2,000 due on the same day each month can be more convenient than making several small payments throughout the month.

Interest savings

You can pay less interest if your new loan has a lower interest rate. For example, this can usually happen when you consolidate credit card debt (notorious for expensive rates) into a personal loan.

Faster payoff

Paying less interest each month can have a double effect by helping you get out of debt fast.

If possible, keep making your existing monthly debt payment if your new monthly obligation is for a small amount.

Your excess payments can reduce your principal to bump up your debt-free date. Even an extra $20 per month helps out.

How to Consolidate Debt

Following these steps can help you look at your complete financial picture to make a debt payoff plan.

Add up debt

First, make a list of your debts which can include:

  • Credit cards
  • Personal loans
  • Lines of credit
  • Car loans
  • Medical bills
  • Student loans

Taking it a step further, identify loans with the highest interest rates as they can gain the most benefits.

Calculate savings

The next step is using a debt consolidation calculator to estimate your potential interest savings. These calculators let you enter your current rate, balance, and monthly payment to pinpoint your savings potential.

Then, you can compare your potential savings to your existing lifetime borrowing costs.

During the comparison process, include any application and origination fees for your new loan.

Determine affordability

Being able to save money is fantastic but verify you can afford your new monthly payment.

If the best rate and term are outside your comfort zone, consider a longer repayment term. For example, you may need a five-year debt consolidation loan with a higher annual percentage rate (APR) than a three-year loan but it’s still lower than your current loan APRs.

Weigh options

Consider getting debt consolidation loan quotes from multiple lenders to compare rates, terms, and fees.

Comparing multiple consolidation strategies can help you find the best fit for your situation. For example, a balance transfer credit card or a debt payment plan can be more appropriate.

Types of Debt Consolidation

There are several ways to consolidate your debt, including a couple of hands-on options to make the process easier.

Debt Consolidation Lender

A debt consolidation lender can help you combine several outstanding debts into a single debt consolidation loan. Unlike a personal loan, the lender may send the funds directly to your existing creditor which is helpful.

For example, your unsecured credit card balances might be consolidated separately from a secured asset like an auto loan.

Secured loans that you back with collateral tend to have lower APRs than unsecured versions. However, unsecured consolidation loans are prevalent yet require a higher credit score to qualify for the best rates.


  • One monthly payment
  • Multiple debts qualify
  • Can send money directly to existing lenders


  • Best rates require a higher credit score
  • Upfront origination fees
  • Borrowers must create a plan


LendingTree is one of the best debt consolidation loan marketplaces as you can compare different loan types and lenders.

Checking rates won’t hurt your credit score as the service only conducts a soft credit check. You undergo a hard inquiry when applying for a loan from a lending partner.

Debt Management Plans

Your best option for hands-on help can be a debt management plan. This option is different than debt relief which can partially forgive or cancel a debt balance.

These plans can include these benefits:

  • Personalized debt repayment plan
  • Single monthly debt payment
  • Debt negotiation
  • Credit counseling

It’s possible to get more favorable repayment terms and interest rates to reduce your monthly expenses. However, your plan fees are usually between 15% and 25% of your debt balance.

Your repayment plan may also be aggressive with a 3 to 5-year payoff plan. You must decide if the fees and monthly plan are worth the assistance.

It’s also possible that the service may have you close certain credit cards and you may not be able to apply for new credit from traditional lenders. This is because your affected accounts appear on your credit report as being part of a debt management plan.

Several nonprofit debt management programs are available. You can compare your options with a free counseling session.

After selecting a service, the company will optimize your debts. Next, you begin sending a single monthly payment to the plan provider who delivers the appropriate amount to your creditors.


  • Hands-on help
  • Customized payment plan
  • Potentially faster payoff


  • High plan fees
  • Not all debts qualify
  • Plan appears on credit reports

National Debt Relief

You can receive a free consultation from National Debt Relief to review your consolidation options. The service offers in-house financing for many unsecured debts, such as:

  • Credit cards
  • Personal loans
  • Medical bills
  • Lines of credit
  • Student debts
  • Collections
  • Repossessions
  • Business debts

Most repayment plans last from 24 to 48 months. In addition, the service may also help with debt settlement if that’s the better route for a particular bill.

Debt Consolidation – Personal Loans

Unsecured personal loans can be one of the easiest ways to refinance your debt with a better rate or term. These loans don’t require collateral and usually have a three-year or five-year repayment period.

You can use personal loans for many purposes, but the lender will ask what the primary purpose of your loan is. The loan purpose can affect the APR and term.

Another possibility is that some lenders may only offer personal loans to consolidate credit card debt.

Once you’re approved for a personal loan, your lender deposits the lump sum into your bank account. After that, it’s up to you to use the funds to pay off your outstanding loans.

You can also anticipate a credit score increase by paying off accounts that may not be in good standing. Plus, reducing your debt balance can also improve your score.


  • Doesn’t require collateral
  • Flexible loan purposes
  • Potentially lower APR


  • Up to 5-year repayment term
  • Some lenders may only consolidate credit card debt
  • Can require good credit

Credit Card Balance Transfer

Credit card debt can be the best type of debt to consolidate first as it usually charges the highest interest rates. In fact, an Experian report finds that the average credit card balance in 2021 was $5,525.

0% APR balance transfer promotions can be the best way to pay off smaller credit card balances. Most offers last from 12 to 18 months and have a one-time 3% balance transfer fee.

If you repay the entire balance in the transfer period, the upfront transfer fee is your only charge. However, your remaining balance starts incurring interest charges at the regular purchase APR once the promotional period ends.

There are several rules to be eligible for these offers:

  • Can only transfer credit card balances from a different bank
  • Must complete transfers within the first 60-120 days of account opening (varies by card)
  • Must make a minimum monthly payment
  • Need a qualifying credit score

Most balance transfer credit cards don’t have the best ongoing rewards programs or card benefits. So after paying off your balance, you may decide to close the account if you don’t want to keep the card open to build credit.

If you have a large balance that requires several years of repayments, you may decide to pursue a debt consolidation loan instead. While you pay interest from the beginning, you avoid two credit checks if you first seek a balance transfer and then move the remaining amount to a personal loan.

  • Interest-free payments for 12+ months
  • No annual fee
  • Can build credit long-term


  • One-time balance transfer fee
  • Remaining balance incurs a high APR
  • Short introductory transfer window

Retirement/Savings Account

Tapping your savings account or retirement fund is another solution to avoid credit checks and interest payments.

This option can provide short-term peace of mind if you’re financially struggling. For example, you need to get out of debt to afford your basic living expenses.

However, not everyone has ample cash reserves to pull from and you might be one surprise bill away from going back into debt if you don’t have an emergency fund.

More importantly, you will need to replace your funds to have more money in the future.

If you pursue this option, consider withdrawing your bank savings first as you will avoid fees and interest.

Retirement account withdrawals incur a 10% early distribution policy if you’re younger than 59 ½ years old. Unfortunately, your distributions can also be subject to income taxes. You also miss out on future investment gains, potentially leading to long-term financial insecurity.

You may also be eligible for a 401(k) loan which doesn’t incur penalties and interest. So while you miss out on investment gains while repaying your loan, you have a plan to rebuild your nest egg.


  • No credit check
  • Savings withdrawals are penalty-free
  • Quickly access cash


  • Penalties and taxes for retirement distributions
  • May not rebuild the balance
  • Fewer funds to earn compound interest

Home Equity Loan

A home equity line of credit (HELOC) is similar to a personal loan as you can use your funds for many purposes. Many lenders let you borrow up to 80% of your home equity (some lend up to 85%).

Your loan APR can be lower than a personal loan as your residence secures this loan. Unfortunately, you will have a variable interest rate that increases with each Federal Reserve rate hike. The lender may also foreclose on your house if you default on your HELOC.


  • Low APR
  • Can make multiple withdrawals
  • Multi-year repayment schedule


  • Variable APR for HELOCs
  • Your home is collateral
  • Requires at least 20% equity

Why Consolidate My Debt?

Here are the best situations to consolidate your debt:

  • Debt payment exceeds monthly income: Getting a smaller monthly payment makes it possible to afford your other bills like food, utilities, and rent. You’re also more likely to avoid late fees, penalty interest, and default.
  • Lower interest rate: Qualifying for a better APR can reduce your total interest costs. You can also use your savings to make extra debt payments.

When Debt Consolidation Is Not a Good Option

Debt consolidation isn’t worth the effort if you can’t qualify for a lower interest rate and can afford your current monthly payment. In this situation, try making extra payments when possible.

Consolidating also isn’t worth the effort or expense if you only have several months or less than two years of payments remaining.

Debt Consolidation Alternatives

These alternatives to consolidating or refinancing your loans can be a better option.


Approximately 55% of Americans don’t budget, according to a Penny Hoarder study. Making a spending plan can be all you need to allocate enough cash each month to afford your bills.

Also, consider making extra debt payments to reduce your balance as much as possible.

Either the debt snowball or debt avalanche can help make your extra debt payments more productive:

  • Debt snowball: Focus your extra payments on the smallest debt regardless of its interest rate.
  • Debt avalanche: Pay off debts with the highest interest rate first.

With either strategy, you apply your extra payment to one loan. Then, after paying one account off, you add the monthly payment to your current additional amount on the next loan. You repeat the process until all consumer loans are paid in full.

Cash-out Refinance

A cash-out refinance lets you borrow up to 80% of your home equity with a fixed interest rate. This loan replaces the rate and term for your entire mortgage.

You may consider this option if your cash-out interest rate is lower than a HELOC and you can also improve your first mortgage terms.

Debt Settlement

Credit counseling agencies that offer nonprofit debt consolidation may also help you navigate a debt settlement plan — when that’s the better option.

If so, the agency works with your lender or collection agency to reduce the amount you owe. This situation is usually better than declaring bankruptcy for you and the lender.


As an option of last resort, you can file for bankruptcy to discharge your unpaid debts and be eligible for legal protections. This process can be expensive, time-consuming, and remains on your credit report for up to 10 years.

There are two different types of personal bankruptcy: 

  • Chapter 7 (liquidation bankruptcy): Usually takes several months and requires selling personal assets to pay off your debts. This can be the better option if you don’t own a home or earn a limited income.
  • Chapter 13 (reorganization bankruptcy): Requires up to five years of structured payments to satisfy debt obligations. You’re more likely to be able to keep your house and car with this option.

How to Get Started

You can start by comparing debt consolidation loan rates from an online lender or a local bank.

If you prefer hands-on help, a credit counseling agency can review your situation and help you create a personalized plan.

Debt Consolidation FAQs

Does debt consolidation work on a limited income?

Yes, it’s possible to consolidate debt on a smaller income but you may need a longer repayment term to achieve an affordable monthly payment.

What type of loans can I consolidate?

You can consolidate unsecured loans such as credit cards, high-interest personal loans, medical bills, and private student loans. Auto loans can also be consolidated with the vehicle as collateral.

Who can qualify for a debt consolidation loan?

Some of the minimum requirements for a debt consolidation loan include:

  • Fair credit score (650+)
  • Stable monthly income
  • Maximum debt-to-income ratio (DTI) of 43%
  • Minimum $5,000 debt balance

How does debt consolidation affect your credit?

Opening a debt consolidation loan can initially hurt your credit score as you’re opening a new loan account. However, your score will gradually recover as you establish a positive payment history.

Loans enrolled in a debt management plan remain notated on your credit report until that account is paid in full.

How much does it cost to consolidate your debt?

A one-time loan origination fee can be between 1% and 10% of your initial loan balance. You will also make a monthly interest payment.

Debt management plans can cost between 10% and 25%. However, the rates can vary by state law and your household income.

Do lenders perceive debt consolidation negatively?

You will want to wait several months after opening a consolidation loan to establish a payment history and reduce your balance. Lenders may be unwilling to issue new credit until you can show you can responsibly manage your existing balances.

Who can help me consolidate my debt?

National Debt Relief offers free initial counseling and can help you save money with a debt relief plan. Its payment plans cater to your circumstances to avoid high-interest alternatives.

LendingTree makes it easy to compare your debt consolidation options if you’re comfortable doing most of the setup yourself. You can compare personal loan rates and balance transfer offers risk-free.