NerdWallet’s guide to debt consolidation loans

• What are debt consolidation loans?

• How do loans for consolidation work?

• Are debt consolidation loans a good idea?

• Debt consolidation loan interest rates

• How to get a debt consolidation loan

• What to know about debt consolidation loans for bad credit

• FAQs about debt consolidation loans

• Other ways to get out of debt

What are debt consolidation loans?

Debt consolidation loans are a type of personal loan that combine multiple unsecured debts — such as credit cards, medical bills or payday loans — into one fixed monthly payment, making the debt easier to pay off.

As long as the interest rate on the debt consolidation loan is lower than the average rate of your existing debts, you’ll save money and potentially get out of debt faster.

Debt consolidation loans are a particularly smart choice for consolidating high-interest debt, like credit cards.

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How do loans for consolidation work?

Online lenders, banks and credit unions offer debt consolidation loans, which you can usually apply for online. Once you’re approved, the lender deposits the loan into your bank account, and you use that money to pay off all your debts at once, so you’re left with only the new loan. Some lenders will even pay off your creditors for you, saving you that step.

You then make monthly payments toward the debt consolidation loan until it’s paid off and you’re officially debt-free. Payments are fixed for the life of the loan, typically two to seven years.

» MORE: How do debt consolidation loans work?

Debt consolidation loan example

Let’s say you have $10,000 in credit card debt, spread out across four different credit cards.

The average annual percentage rate on a credit card is about 23%. If you’re making a minimum payment of $75 on each card, at 23% APR, it will take you four and a half years to be debt-free, and it will cost you an extra $6,200 in interest, on top of the original debt.

But if you pay off all your credit cards at once using a $10,000 debt consolidation loan, at 15% APR, you’ll save $2,841 on interest and get out of debt six months sooner. Here’s how it breaks down.

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Are debt consolidation loans a good idea?

Debt consolidation loans are a good idea if you can get a lower annual percentage rate than what you're currently paying on your other debts. Like with all financial decisions, carefully weigh the pros and cons of consolidating your debts before you apply for a loan.

Pros of debt consolidation loans

• You pay less in interest: By getting a debt consolidation loan at a lower rate than your current debts, you’ll save on interest, which can make debt more manageable.

• You may get out of debt faster: Because you’re saving on interest, you can use that savings to make larger payments on your loan, speeding up your debt payoff timeline.

• You have only one payment: Unlike juggling multiple credit card bills or other debt repayments, you’ll have only one monthly payment with a consolidation loan.

• You have a clear finish line: A debt consolidation loan gives you an exact date you’ll be debt-free, which can help you stay motivated as you make the payments.

Cons of debt consolidation loans

• You may not qualify for a low enough rate: Not all consolidation loans come with low interest rates, and if you have bad credit (a score below 630), you may not get a rate that’s lower than your current debts.

• You still have debt you need to manage: Consolidating debt is a smart choice for many, but remember the debt doesn’t disappear — it goes somewhere else. Most consolidation loans offer terms of two to seven years, so be prepared to stick to your monthly payments over that time period.

• Consolidation won’t fix core spending issues: If you’re in debt because you struggle to budget, a debt consolidation loan won’t fix that. It may even make things worse if you use your newly freed credit cards to rack up additional debt.

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Debt consolidation loan interest rates

The interest rate you get on a debt consolidation loan depends on factors like your credit score and debt-to-income ratio, which is the percentage of your monthly income that goes to debt payments. Borrowers with good to excellent credit scores tend to get the lowest interest rates on debt consolidation loans. See the table below to get an idea of what rate you can expect.

Average debt consolidation loan interest rates

Source: Average rates are based on aggregate, anonymized offer data from users who pre-qualified through NerdWallet from October 1, 2024, through October 31, 2024, and chose credit card consolidation or debt consolidation as their loan purpose. Rates are estimates only and not specific to any lender. The lowest credit scores — usually below 500 — are unlikely to qualify. Information in this table applies only to lenders with maximum APRs below 36%.

How does the Federal Reserve impact interest rates?

The Federal Reserve doesn’t directly set interest rates on debt consolidation loans. It sets the federal funds rate, which trickles down to impact the interest rates of many types of credit, including debt consolidation loans.

You’ve probably heard that rates are high right now, and while that’s true, fixed-rate credit, such as debt consolidation loans, tend to be less affected.

On November 7, 2024, the Fed cut rates by a quarter point, its second cut of 2024. These cuts may lead to lower interest rates on debt consolidation loans, though it’s hard to say by how much.

Since lenders look at multiple factors when determining what rate you’ll get on a debt consolidation loan, it may be best to consolidate now and start the path toward getting out of debt, instead of waiting for more rate cuts that aren't guaranteed.

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How to get a debt consolidation loan

1. Add up current debts and calculate the combined interest rate

The first step in getting a debt consolidation loan is having a clear picture of your current debt. You can use NerdWallet’s debt consolidation calculator to see your total balance, total monthly payment and combined interest rate across all debts.

Keep two numbers in mind moving forward: Your total debt, because this is the loan amount you need to apply for, and your combined interest rate, because you’ll want a lower interest rate on your consolidation loan.

2. Pre-qualify and compare loan options

One of the best ways to compare loan offers is to pre-qualify with multiple lenders, which lets you see your potential loan terms, including APR, without any effect on your credit score. Though not all banks or credit unions offer pre-qualification, most online lenders do.

» MORE: Pre-qualify for free on NerdWallet

3. Apply for a debt consolidation loan

Once you’ve decided on a lender, it’s time to apply for the loan.

Most loan applications are online and ask you to supply personal information like your Social Security number, address and other contact details. You also may be asked to provide proof of identity, employment and income.

Once you’ve submitted your application, the lender will make an approval decision. If you’re approved, you’ll sign the loan agreement and receive the funds. Funding time varies among lenders, but some lenders can fund the same day you’re approved.

4. Pay off creditors

Here’s the most important step: Use the loan proceeds to pay off your existing debts. Some lenders send the funds to your creditors for you, so you’ll need to provide account information about your existing debts — and check the accounts to make sure they’re paid off.

If a lender doesn’t offer direct payment, they’ll deposit the funds in an account of your choosing or mail a check, if you prefer. It’ll be up to you to make sure the right amount goes to each debt.

5. Begin making payments on your new loan

Once your existing debts are paid, you’re left with your new loan. Personal loan payments are monthly, though there’s usually no fee for paying off a loan early. Make a plan now to manage your personal loan payments.

As you make progress on paying off your loan, try to keep your credit card balances at or near zero until you’re debt-free. But avoid closing the accounts, which can lower your credit score.

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What to know about debt consolidation loans for bad credit

You can still get a debt consolidation loan if you have bad credit (a 629 credit score or lower).

Look specifically for lenders that let you pre-qualify with a soft credit check — that way you can check if you meet the lender’s requirements without taking a hit to your credit score. This will also help you check if the rate you qualify for is lower than your existing debts.

Some online lenders specifically offer debt consolidation loans for borrowers with bad credit. If you’re not sure where to begin, your local credit union is also a good first stop.

» COMPARE: Best debt consolidation loans for bad credit

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Frequently asked questions about debt consolidation

Does getting a debt consolidation loan hurt your credit?

Applying for a debt consolidation loan requires a hard credit check, which can temporarily ding your credit score. Making late payments on your new loan can also hurt your credit score. But if you use the debt consolidation loan to pay off debt, then pay off the new loan on time, the overall effect on your credit should be positive.

What is the minimum credit score for a debt consolidation loan?

The minimum credit score for a debt consolidation loan varies by lender. Bad-credit lenders may accept borrowers with credit scores of 629 or less.

What qualifies you for debt consolidation?

To qualify you for debt consolidation, a lender typically looks at your credit score, credit history, income and any existing debts. There are ways to boost your chances of getting approved for a loan, like building your credit and paying off small debts.

Is it hard to get a loan for consolidation?

You can apply for most debt consolidation loans online, including loans from banks and credit unions. A loan application will ask for details about the loan you want, your personal and contact information, and information about your income and any debts. It may require additional documentation, like proof of identity and proof of income.

Can I still use my credit card after debt consolidation?

You can still use your credit cards after debt consolidation. Consolidating your debts doesn’t close your credit cards, it just pays them off, but be careful about increasing your overall credit utilization and ending up in more debt than before.

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Other ways to get out of debt

A debt consolidation loan isn’t your only option for paying off debt.

0% balance transfer credit card

For borrowers with good to excellent credit, transferring debts to a 0% balance transfer card is a great option — as long as you can pay it off during the introductory period, which can last up to 21 months.

This is sometimes called credit card refinancing, and it's similar to a consolidation loan. But because you pay no interest during the introductory period, you can get out of debt even faster.

» MORE: Best balance transfer credit cards

Credit counseling

Nonprofit organizations offer credit counseling, which includes helping you create a debt management plan. Similar to other consolidation products, these plans roll your debts into one manageable payment at a reduced interest rate.

» MORE: Find the right debt management plan

DIY debt payoff strategies

If you’re not sure how to tackle debt, you may not need to consolidate. The debt snowball and debt avalanche methods are two common and effective strategies for paying off debt.

The snowball method focuses on paying off your smallest debt first, building momentum as you go. The avalanche focuses on paying off the debt with the highest interest rate first, then applying the savings elsewhere. Both can boost your payoff speed.

Debt relief

If you have significant debt (40% or more of your income) and no plan to pay it off, you may want to explore other strategies, like debt settlement or bankruptcy. Both of these options help eliminate unsecured debts, but they hurt your credit and are typically a last resort.