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What Is Debt Consolidation?

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When you’re making every effort to live within your means, save money for emergencies, and spend wisely, carrying debt can feel like an overwhelming burden to your financial success. Even with a plan in place, it can be especially hard to stay motivated when the finish line keeps moving—which can often happen with compounding high-interest credit card debt and never ending bills.

In some cases, a debt consolidation loan might help. But as with any loan product, you should carefully consider the details before deciding if a debt consolidation loan will help you.

In This Article

What Is Debt Consolidation?

Debt consolidation is the process of refinancing multiple debts into a single, new loan. People often look to consolidate high-rate debts—like high-interest rate credit cards, medical debts, and other loans—with a lower-rate loan to help them save money.

Debt consolidation can also make managing your finances easier because you’ll have fewer payments each month. Depending on your new loan’s terms, you may also be able to lower your monthly payment.

How Does Debt Consolidation Work?

Debt consolidation can work differently depending on the lender and the type of debts you’re consolidating. But using a personal loan to consolidate credit card debt is a commonly used option.

For example, you might have three credit cards with a total of $15,000 in credit card debt and high APRs. Even if you’re making on time payments, factors like compounding interest or juggling multiple bills might make paying down debt difficult.

By checking personal loan offers, you might find a $15,000 personal loan with a lower APR and fixed term—which means you’ll know exactly how much you need to repay each month. You can take out the loan, receive the funds, and then use the money to pay off the three credit cards.

You’ll still have $15,000 to repay, but you now have a clear timeline for paying off the debt based on the loan’s repayment tem. You could also save money overall if you lock in a lower interest rate.

4 Ways to Consolidate Debt

You have multiple options for consolidation depending on what types of debt you have and what assets you have access to.

1. Use a debt consolidation personal loan.

Unsecured personal loans are fixed-rate installment loans and one of the most popular options for consolidating debt. Because the loan is unsecured, you don’t risk losing any property when taking out the loan. Additionally, you may be able to qualify for a low interest rate based on your credit and financial situation.

Personal loans are also flexible in that you can use the money for almost anything. If you have several types of debt, such as medical bills and credit cards, you can consolidate them all into your new personal loan. However, there are some debts, such as student loans, that cannot be consolidated with a personal loan.

2. Tap your home equity.

If you own a home and have built equity, you may be able to take out cash at a lower interest rate and use it to pay off other debts. There are typically three ways to do this:

  1. Home equity loan (HEL). A HEL is a second mortgage that works similarly to your primary mortgage. You’ll likely receive your money in a lump sum and repay the amount with a fixed interest rate and monthly payment.
  2. Home equity line of credit (HELOC). While HELOCs are also second mortgages, they work more like credit cards than home equity loans. Rather than receive money in a lump sum, you’ll have access to a line of credit you can draw from again and again, up to the limit. You’ll only pay interest on the amount you borrow.
  3. Cash-out refinance. Refinancing your mortgage is the process of replacing your entire current mortgage with a new mortgage loan. With a cash-out refi, your new mortgage will have a higher outstanding balance and you receive the difference as cash.

For all home equity options, your borrowing limit and rate may depend on the option you choose, the current appraised value of your home, the remaining balance of your mortgage, and your credit profile.

Before dipping into your equity, consider the potential consequences if something goes wrong—like the possibility of your home’s value declining. Because your loan may be secured by your home, it could be at risk if you fall behind in payments.

3. Consider the federal student loan consolidation program.

While student loans typically can’t be consolidated with a typical personal loan, you still have consolidation options. For example, federal student loans may be eligible for consolidation with a federal Direct Consolidation Loan.

Your Direct Consolidation Loan’s interest rate will be the weighted average of the interest rates on the loans you’re consolidating, which means it won’t save you money. Still, consolidating your loans could make managing your payments easier and may make certain loans eligible for different federal repayment plans or forgiveness programs.

Be sure to review your current loans and the pros and cons of consolidation closely. Consolidation might not be a good idea if you wind up paying more in interest due to having a longer repayment term, lose borrower benefits, or lose progress toward a forgiveness program.

Some student loan borrowers alternatively consolidate and refinance their federal student loans with a private student loan. Private student loans’ interest rates may depend on your credit, meaning you might qualify for a lower rate. However, if you replace federal student loans with private student loans, you’ll no longer be eligible for any federal student loan benefits or programs.

4. Look into credit card balance transfer offers.

Credit card balance transfers let you transfer debt from one credit card to another..

A 0% APR balance transfer credit card offer may save you money on interest during the promotional period. But you may have to pay balance transfer fees and the high balance could hurt your credit scores. You also won’t have a fixed repayment plan, and it could be difficult to pay off the card before the promotional period ends.

The Pros and Cons of Debt Consolidation

Weigh the pros and cons carefully if you’re considering consolidating your debts. The specifics may vary depending on the loan you’re using and the types of debt you’re consolidating.

Pros of Debt ConsolidationCons of Debt Consolidation
Can lower the interest rate on your debtMay require good credit
Can lower your monthly paymentsA fixed repayment term could take longer to repay
Streamlines multiple monthly payments into oneMight increase the risk of losing collateral, depending on loan type
May help your credit score if you don’t add new credit card debtMay charge fees

When Consolidating Debt Could Make Sense

Consolidating your debts could make sense when it helps you save money or makes managing your finances easier. Compare your loan offers against your needs to see if you’ll benefit.

You can save money.

If you check your loan offers and find that you can get a loan with a lower interest rate than you’re currently paying, consolidating the debt could save you money overall.

You may have several loan offers to choose from, and can decide what’s best based on your goals. Generally, a shorter repayment period can lead to the most savings, but it will also have the highest monthly payment.

You want fewer payments.

Combining multiple monthly loan payments into a single payment could make planning your monthly finances easier. Sometimes, even if it doesn’t lead to significant savings, consolidation could be helpful as a debt management tool.

You want lower monthly payments.

Consolidation may also help lower your monthly payments, especially if you choose a loan offer with a long repayment period. Even if your loan has a lower interest rate, longer loan terms may lead to paying more interest overall. But it could be a worthwhile tradeoff to free up extra money in your monthly budget.

When Consolidating Debt Might Not Make Sense

If you don’t qualify for a loan with a lower interest rate or monthly payment, then you may not want to consolidate your debts right now. Additionally, there are a few scenarios when consolidation isn’t ideal, even if you can lower your interest rate.

You’re close to paying off your debt.

When you’re only a few months away from paying off the debt, staying the course could be the best option. Once you factor in a debt consolidation loan’s origination fee or credit card balance transfer fee, you might wind up spending more overall, even if you lower your interest rate.

You don’t want to take on more risk.

The savings might not be worth the added risk if you’re considering using a secured loan, such as a mortgage-backed loan, to consolidate unsecured debts. Similarly, even if it saves you money in the short term, using a private student loan to refinance and consolidate federal student loans could lead to more risk because you’ll lose access to federal benefits.

If you might wind up getting deeper into debt.

Consolidating high-interest credit card debt can be a productive step toward getting out of debt. However, consider why you have credit card balances in the first place. If it’s primarily from overspending, freeing up your credit limits could lead to more overspending and more overall debt.

How to Consolidate Debt in 5 Simple Steps

Consolidating debts can be straightforward, but it’s also helpful to have a roadmap of what to expect. Once you determine if it’s a good idea, you may be able to complete the process within a few days. Although, you’ll want to keep an eye on your old accounts for a little longer to make sure everything is settled correctly.

When using an unsecured personal loan for debt consolidation, follow these five simple steps.

1. Organize your current debts.

Create a list of all your loans with the loan amounts, rates, and minimum payments. You’ll want to know how much money you need to borrow to pay off all your current debts. And the loans’ terms, which will help you determine if refinancing the debt is a good idea.

2. Gather loan offers.

Many online lenders will let you get pre-approved for a personal loan with a soft credit inquiry—the type that doesn’t impact your credit scores. Get quotes from several lenders to see which loan options have the best rates and terms. Pay attention to the loans’ origination fees, interest rates, repayment terms, and the resulting APRs.

3. Compare the best offer to your current accounts.

Compare the best loan offer with your current debts to see if refinancing makes sense. You can also pick and choose—you don’t need to refinance all your debts.

4. Complete the application and pay off your debts.

Next, complete the loan application and use the funds to pay off the debts that you want to consolidate. You may be able to have your new lender send the money directly to your current creditors. Or, you might be sent the money and then have to manually pay off each account. In either case, continue making payments as usual until you confirm the balances are paid off.

5. Repay your loan.

You’ll now make payments toward the new loan. Set up autopay or mark your calendar to ensure you don’t accidentally wind up with late payments.

Debt Consolidation with LendingClub

LendingClub Bank offers unsecured debt consolidation loans. Checking your loan offers only takes a few minutes and won’t impact your credit score.

You may be able to borrow up to $40,000 to consolidate a variety of debts. And, once approved, money could be in your account within two days.1 In the case of our balance transfer loans, you can have the funds sent to any of the creditors in our payment network. Any remaining funds will be sent to your account.

What Is Debt Consolidation FAQs

Still have questions? Some of these commonly asked questions may provide the answer.

What is credit card refinancing vs. debt consolidation?

Credit card refinancing may refer to paying off a single credit card balance with a new debt. Consolidation is a type of refinancing that involves taking out a new loan to pay off more than one account.

What is a good APR for a debt consolidation loan?

Applicants with excellent credit may qualify for a very low APR. However, if you have high-interest debt, any loan with a lower APR might be a good option—even if it’s not an especially low rate.

Is debt consolidation the same as debt settlement?

Debt consolidation involves replacing current debts with a new loan. Lower monthly payments and interest rates can make paying off the loan easier, helping you get out of debt while improving your credit.

The end goal with debt settlement is to get a creditor to accept less than you owe to settle the account. However, there’s no guarantee the creditor will agree. And, in the interim, debt settlement companies may advise you to stop making payments, which could hurt your credit scores and lead to additional fees and interest.

Will debt consolidation hurt my credit?

Obtaining a new line of credit may cause your credit score to decrease temporarily. But in time, consolidating credit card debt with a LendingClub Bank personal loan may actually increase your credit score by lowering your credit utilization ratio. Additionally, your on-time payments could be added to your credit reports and help your credit.2

1 Between July 2021 and September 2021, more than two-thirds of personal loans issued by LendingClub Bank were funded within 48 hours after loan approval. The time it takes for a loan to be funded is not guaranteed and individual results vary based on multiple factors, including but not limited to investor demand.

2 Reducing debt and maintaining low credit balances may contribute to an improvement in your credit score, but results are not guaranteed. Individual results vary based on multiple factors, including but not limited to payment history and credit utilization.

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