What Is Loan Consolidation? A Guide to Simplifying Your Debt

Managing multiple credit cards or loans can quickly become overwhelming. Every month, you have to keep track of different due dates and minimum payments. If you find yourself in this situation, loan consolidation may be a good option for you.

Loan consolidation makes your debt more manageable, and it could help you secure a lower interest rate and better loan terms if your credit is strong. But before you apply, it's important to understand how loan consolidation works and what the pros and cons are.

What is loan consolidation?

Loan consolidation combines multiple debts into a single loan or line of credit, ideally with a lower interest rate and a more manageable repayment schedule. Instead of managing multiple lenders with various due dates, interest rates, and repayment terms, you'll make one monthly payment to a single lender.

“For example, if you have a mortgage of $100,000 and have credit cards of $25,000, you can consolidate the $25,000 of debt into one mortgage payment and have a new loan of $125,000,” explains Jeremy Schachter, branch manager at Fairway Independent Mortgage Corporation.

“Even if your mortgage payment goes up, if you're saving money each month by eliminating those credit card payments, that's money in your pocket,” he adds.

See Also: Best Debt Consolidation Loans of 2025

How does loan consolidation work?

Loan consolidation works by combining multiple debts — such as credit cards, auto loans, or personal loans — into one new loan with a single monthly payment.

There are a few different ways to do this, depending on the debt you have:

• Debt consolidation loan: A debt consolidation loan is a type of personal loan you can apply for through a bank, credit union, or online lender and use it to pay off your other debts. This leaves you with just one new loan to repay.
• Home equity loan or HELOC: If you own a home and have built up equity, you can borrow against that value to pay off your other debts through a home equity loan or HELOC. This turns multiple balances into one home-related loan, often at a lower interest rate.
• No-interest credit card: Some credit cards offer a 0% introductory interest rate for a limited time. You can transfer your existing credit card balances to this new card and pay it down during the interest-free period. This is a form of consolidation, but only works if you pay off the balance before the promotional rate ends.

Loan consolidation not only simplifies your monthly payments, but it can also improve your interest rates and repayment terms. However, the exact impact on your monthly payments will depend on the new repayment term you choose.

Longer loan terms will reduce your monthly payments, making them easier to manage, but you'll pay more in interest over the life of the loan. Shorter loan terms come with larger monthly payments, but you'll pay less interest overall. Many lenders will offer lower interest rates in exchange for shorter loan terms.

Loan consolidation vs. loan refinancing

Loan consolidation vs. refinancing both involve restructuring debt, but borrowers choose these options for slightly different reasons.

• Consolidation: The goal of loan consolidation is usually to simplify your finances by reducing your monthly payments. This can make your debt easier to manage, even if the total amount you repay stays the same.
• Refinancing: Most people refinance their loans to lower the total cost of borrowing. The process involves replacing one or more loans with a new loan, ideally at a lower interest rate. Refinancing is usually a good option if you have an excellent credit score and a stable income.

“Whether borrowers should consolidate or refinance depends on their financial goals,” says Bill Lyons, president and CEO of Griffin Funding, a mortgage lending company.

“If the borrower's goal is to lower payments without altering the expectations of the loan, consolidation is better. However, if a borrower wants to pay less interest overall or wants to shorten the loan term, refinancing makes more sense,” explains Lyons.

Types of loans that can be consolidated

Here's a closer look at how loan consolidation looks for different types of loans:

• Credit card debt consolidation: Credit card debt consolidation involves combining multiple credit cards into one new loan. You'll usually do this through a personal loan or a balance transfer card with a 0% introductory APR. Credit cards usually come with high interest rates, so restructuring this debt can save you a lot of money in interest.
• Auto loan consolidation: Auto loan consolidation combines multiple auto loans into one. You could do this by taking out a personal loan or a home equity loan.
• Personal loan consolidation: If you have multiple personal loans, you can consolidate them into one loan. You'll do this by taking out a new personal loan, hopefully with a lower interest rate.
• Mortgage consolidation: You can use your existing mortgage to consolidate other debt, like credit cards or personal loans. This can be done through a cash-out refinance, a HELOC, or a home equity loan. However, you have to be careful with this strategy because if you're unable to repay the loan, your lender could foreclose on your home.
• Federal student loan consolidation: You can combine eligible federal student loans into a Direct Consolidation Loan. While it won't lower your interest rate, it can simplify repayment and help you qualify for income-driven repayment or certain loan forgiveness programs. Your new rate will be the weighted average of the loans you're consolidating.

Pros and cons of loan consolidation

Loan consolidation makes managing your debt easier. Instead of juggling multiple credit cards and loans, you combine them into one loan with one monthly payment. This can help reduce the risk of missed payments and late fees. On-time payments can also help improve your credit score over time.

Another potential benefit is getting better repayment terms. For example, if you qualify for a lower interest rate or choose a longer loan term, you could lower your monthly payment and make it easier to stay on track.

However, there are downsides to consider as well. If you extend your repayment schedule, you'll end up paying more money in interest over the life of the loan. You may also have a hard time qualifying for a low interest rate if you don't have good credit. Additionally, some consolidation loans may come with origination fees, which can add to your total costs.

Learn More: Pros and Cons of Debt Consolidation

How to consolidate loans

You can apply for loan consolidation through a bank, credit union, or online lender. Before submitting your application, figure out exactly how much debt you need to consolidate and which loan type is best for your situation.

It's also a good idea to check your credit score to see where you stand. You can request a free copy of your credit report at AnnualCreditReport.com.

Once you know how much money you need to borrow, apply online. The documentation required will vary depending on your lender and the type of loan you're applying for, but most require proof of employment and financial documents like tax returns and bank statements.

Make sure to review the closing disclosure before finalizing your new loan. In particular, make sure you understand your interest rate, repayment terms, and any fees your lender charges. Once you close on the loan, you'll either receive the funds or your lender will pay your creditors directly.