If you have debt, you may be unsure how to get out from under it. Fortunately, a debt consolidation loan, which is a type of personal loan, can be used to pay off your existing debts and possibly reduce your interest rate. In the right circumstances, they can streamline your payoff strategy.
Understanding debt consolidation
Debt consolidation is the process of combining your existing debts into one by taking out a new personal loan or line of credit. Once you take out the loan, you pay off your existing debts, then pay off your new loan in monthly installments.
In some cases, debt consolidation can help you secure a lower interest rate, lower your monthly payments, or pay off your debt more quickly. Regardless of these benefits, one of the biggest advantages of debt consolidation is the fact that it simplifies your finances. Instead of making payments toward several debts each month, you only have one payment to worry about.
On the other hand, debt consolidation isn’t a quick fix for getting out of debt or other financial problems. Consolidating debt doesn’t make it disappear — it just reorganizes it into a (hopefully) more manageable loan and can make it easier to stay on top of your monthly payments.
For example: Let’s say you have three loans totaling $12,000. Your average personal loan interest rate is 19%. You’ll pay off these loans in 24 months with a combined monthly payment of $605 between the three debts. After two years, you’ll have paid off the loans and a combined $2,518 in interest.
However, say you find out you can consolidate your debt with a personal loan that’s charging only 14.5% interest. With the same repayment term of 24 months, you’ll pay off your $12,000 debt with monthly payments of $579. And your interest over 24 months with your new loan would be just $1,896.
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What to consider before consolidating debt
As the above example shows, debt consolidation loans can help you save money. But it doesn’t always work out that way — and it’s not best for every situation. Sometimes, debt consolidation won’t be worth the fees and administrative work. Other times, your situation may be at the point where debt relief is the better option.
Here are some factors to consider before deciding to consolidate your debt.
- Your total amount of debt: If you have a ton of debt, along with a high debt-to-income ratio (DTI), debt consolidation may not be the best idea. In fact, most lenders prefer a DTI no higher than 35%. So a high DTI may make it tough to qualify for a debt consolidation loan at all. If you're drowning in debt, a debt relief strategy is probably a better option.
- Your interest rates: If your current interest rates on your loans are already low, it may not be worth getting a debt consolidation loan. But if you have high interest rates on your debt — and you think you could qualify for a lower rate with your current financial situation — it may be a good idea.
- Repayment terms: If you have a plan to pay off your current loans within a year, it may not be worth consolidating. The time and fees required to consolidate may not be worth the benefit of doing so. But if you still have years of payments to go, consolidating with a lower interest rate is often worth it.
- Your monthly payment: You should only consolidate if you can afford your new monthly payment. So if you can’t qualify for a loan that offers a manageable monthly payment, consolidating isn’t a good idea.
- Your financial habits: Debt consolidation has the potential to help you get out of debt, but it won’t change your spending habits. If you’re still spending beyond your means, consider addressing the underlying issues before attempting debt consolidation.
Check Out: Debt Relief Programs: Options to Reduce Debt
Can a debt consolidation loan hurt your credit score?
Debt consolidation can impact your credit score. Whether it has a positive or negative impact depends on your financial habits.
Initially, consolidating your debt can have a slight, temporary, negative impact on your credit score. That’s because when you apply for a loan, the lender performs a hard credit check. This credit check temporarily lowers your score. After consolidating, your score can continue dropping if you fall behind on payments or miss them altogether.
On the other hand, debt consolidation can also help your credit. By consolidating your payments into one, debt consolidation can help you keep up with your payments more easily. By making payments on time — and eventually paying off your loan — you can gradually improve your credit score. Plus, a debt consolidation loan can diversify your credit mix and reduce your credit utilization — both of which have positive impacts on your credit score.
How to apply for a debt consolidation loan
Applying for a debt consolidation loan is similar to applying for other personal loans. But the process can vary by lender. Generally, you can apply and qualify by following these steps:
- Check your credit score: It’ll be easier to qualify for a personal loan with good credit. Check your score before you start applying for an idea of the rates you can get. If your score isn’t great, consider trying to improve it before applying for a new loan.
- Compare lenders and pick a loan: Research different lenders to narrow down your best options. Certain lenders may even let you prequalify for a loan to get a better idea of the interest rate you’re likely to get — without hurting your credit score. When picking a loan, make sure it has terms that work for you. Use a personal loan calculator to estimate monthly payments, and make sure you can afford them.
- Complete the application and get your funds: After choosing a loan, you can typically apply online. You’ll need to provide some documentation, like multiple forms of ID, proof of employment, tax forms, and proof of address. After verifying your information, the lender will approve (or reject) your application. Then it can take a matter of days or weeks, depending on the lender, for you to receive the funds.
Advertiser DisclosureOverview
Lightstream is one of three Credible partner lenders to offer loan amounts up to $100,000, which makes it ideal for financing large expenses like home improvements or weddings. Funds are available as soon as the same day you apply, and you'll have up to 12 years to repay certain types of loans, including home improvement loans, RV loans, and boat loans. There are no origination fees, and rates are low — Lightstream's lowest APR beats SoFi's advertised lowest APR by 1 percentage point. But you'll need good credit to qualify.
Unlike most lenders, Lightstream does not let you prequalify on its site. Nor does it provide a contact phone number next to its customer service hours on its website.
Repayment terms
2 - 12 years, depending on loan purpose
Eligibility
Available in all states except RI and VT
Time to get funds
As soon as the next business day
Loan uses
Credit card refinancing, debt consolidation, home improvement, and other purposes
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Upstart has one of the lowest available APRs of Credible partner lenders and of all non-partners we reviewed, making it a good choice for well-qualified applicants. However, it's also is one of few lenders that doesn't have a minimum credit score requirement (if you apply on the lender's website), which makes it an option if you have bad credit or no credit history. Upstart may charge an origination fee as high as 12%, but good-credit borrowers may not be charged one at all.
Trustpilot gives Upstart 4.9 stars, which is the highest of all lenders we reviewed.
Time to get funds
As soon as 1 to 3 business days
Loan uses
Pay off credit cards, consolidate debt, relocate, make a large purchase, and other purposes
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Discover Personal Loans offers low APRs, repayment terms up to seven years, no origination fees, nationwide availability, and doesn't require your Social Security number to prequalify on its site. You'll need to have an annual income of at least $40,000, and a FICO score 660 or higher, to be eligible. If your credit score is fair or poor, you'll need to go elsewhere, as Discover doesn't allow cosigners.
Funds are available as soon as the next business day after loan approval.
Eligibility
Available in all 50 states
Time to get funds
Funds can be sent as soon as the next business day after acceptance
Loan uses
Auto repair, credit card refinancing, debt consolidation, home remodel or repair, major purchase, medical expenses, taxes, vacation, and wedding
Read full reviewOverview
PenFed is a credit union that offers personal loans to applicants with good credit. Though you'll need to become a member to receive a loan, membership is open to everyone. PenFed shines with no origination fees, small available loan amounts, and low interest rates. If you don't have a FICO score above 700, you may not qualify on your own, but can apply with a cosigner with good credit — which is not something most lenders offer.
PenFed doesn't have a minimum income amount, and offers live chat and an entirely online loan application process.
Fees
Unsuccessful payment fee, late fee
Time to get funds
Typically 1 to 2 business days after verification
Loan uses
Debt consolidation, home improvement, credit card refinancing
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Upgrade has a suite of features that make it a very attractive lender: competitive interest rates, discounts for direct pay and autopay, as soon as same-day funding, up to seven-year repayment terms, and nationwide availability. Plus, loans are available to fair-credit borrowers, and you don't need to input your Social Security number to prequalify on the website. Upgrade even offers secured personal loans, which is not common among lenders.
However, Upgrade does charge an origination fee of 1.85% to 9.99%. You must have a FICO score of at least 600 and a minimum income of $25,000 annually to qualify.
Loan amount
$1,000 to $50,000 ($3,005 minimum in GA; $6,600 minimum in MA)
Loan uses
Credit card refinancing, debt consolidation, home improvement, major purchase, other
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LendingClub is a solid lender for good credit borrowers and some fair credit borrowers that apply directly on its website. It's easy to prequalify with LendingClub, especially if you're uncomfortable providing your Social Security number, as the company doesn't require it at the prequalification stage. (You will need to provide it if you move forward with a full application.)
While prequalification is not a guarantee that you'll be approved for a loan, LendingClub does a better job than most other Credible partner lenders at approving applicants that have successfully prequalified. In other words, you're less likely to have your application declined once you apply (if you've already prequalified). LendingClub may charge an origination fee between 3% and 8%.
Eligibility
Available in all 50 states
Loan uses
Debt consolidation, paying off credit cards
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SoFi stands out for offering no-fee personal loans with competitive rates, high loan amounts, long loan terms, discounts for autopay and direct pay, and funding as soon as the same day. Plus, SoFi prioritizes convenience for existing and potential customers with features like live chat and an easy prequalification process that doesn't require your Social Security number.
The main catch is that you need to qualify for a loan with SoFi, which can be hard to do if you don't have good credit. You also won't be able to apply with a cosigner, since SoFi doesn't accept cosigners; nor does it offer secured personal loans.
Fees
Option to pay an origination fee (up to 6%) in exchange for a lower rate
Time to get funds
Typically within a few days, given approval and bank account verification, but sometimes within the same day
Loan uses
Solely for personal, family, or household uses
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Best Egg is a solid lender for a wide range of borrowers and, notably, scored second for personal loan satisfaction in J.D. Power's Consumer Lending Study. It offers competitive rates, reasonable loan terms and amounts, and personal loans for fair credit. You'll need a FICO score of at least 600 to qualify, but the lower your score, the higher your APR may be. The APR includes the interest rate and origination fees, which range from 0.99% to 8.99% with Best Egg.
Note that if you successfully prequalify with Best Egg, you may be more likely to be approved for the loan relative to other lenders you prequalify with. Based on Credible data, borrowers who chose to apply for a loan with Best Egg were more than twice as likely to be approved (relative to most other Credible partners).
Fees
Origination fee, late fee, unsuccessful payment fee, check processing fee
Eligibility
Available in all states except DC, IA, VT, and WV
Time to get funds
As soon as 1 to 3 business days after successful verification
Loan uses
Credit card refinancing, debt consolidation, home improvement, and other purposes
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Avant personal loans are a good choice for borrowers with bad credit looking for small- to moderate-sized personal loans. Loans are available up to $35,000 and you could get the money as soon as the next business day after approval. Plus, Avant is more likely than some lenders to approve the applications of borrowers who've prequalified with Avant. However, the lender charges an origination fee up to 9.99%, and its top-range interest rates are among the highest of the lenders we reviewed.
Fees
Origination fee, late fee, dishonored payment fee
Eligibility
Available in all states except HI, IA, MA, ME, NY, VT, and WV
Time to get funds
As soon as the next business day (if approved by 4:30 p.m. CT on a weekday)
Loan uses
Debt consolidation, emergency expense, life event, home improvement, and other purposes
Repayment terms
1 to 5 years (2 to 5 years through Credible)
Read full reviewOverview
It’s worth considering a personal loan through Splash if you have good credit (ideally, a FICO score above 700). The platform offers loans from a wide range of lenders, and next-day funding is available. Plus, Splash has a live chat feature so you can get real-time answers without having to wait on hold or for an email. Loans are available up to $100,000 if you apply via Splash’s website.
Rates are competitive, but borrowers with excellent credit may find lower APRs elsewhere. If you need a repayment term longer than five years, you’ll need to look elsewhere as well.
Loan amount
$5,000 - $100,000 (up to $35,000 on Credible)
Eligibility
Available in all states except VT. OH and NM net disbursed amount must be greater than $5,000. MA must be greater than $6,000
Time to get funds
Same day available, typically 1-3 days
Loan uses
Debt consolidation, home improvement, medical expenses, major purchases
Read full reviewOverview
Universal Credit is one of a handful of lenders that offers personal loans for bad credit. If your FICO credit score is at least 560, you may be eligible for a Universal Credit personal loan. It offers loan amounts up to $50,000, repayment terms up to seven years, and discounts for direct pay and autopay. Funds are available as soon as the next business day after loan approval.
Note that rates and fees can be relatively high — you may pay an origination fee from 5.25% to 9.99%, and APRs start at 11.69%. If you get a loan with a high interest rate, consider refinancing your personal loan at a lower rate once you've improved your credit score.
Eligibility
A U.S. citizen or permanent resident; not available in DC, IA, SC, WV
Time to get funds
As soon as 1 business day after acceptance
Loan uses
Debt consolidation, pay off credit cards, home improvements, unexpected expenses, home and auto repairs, weddings, and other major purchases
Read full reviewOverview
Happy Money has been in operation since 2009 (formerly known as Payoff). It's an option for fair-credit borrowers (plus those with better credit), and notably has a relatively low top-end APR. In other words, you could qualify for a lower rate with Happy Money with fair credit, relative to other lenders that offer fair-credit loans. The company does charge an origination fee on some loans, up to 5%, but that's not as high as some other lenders' origination fees.
You should be prepared to wait a few days to get your money, as funding can take three to five days once approved. And loans aren't available in Massachusetts or Nevada. Happy Money has an A+ rating with the BBB and is ideal for debt consolidation and credit card consolidation loans.
Eligibility
Available in all states except MA, MS, NV, and OH
Time to get funds
As soon as 2 - 5 business days after verification
Loan uses
Debt consolidation and credit card consolidation only
Read full reviewOverview
BHG Money stands out for offering the largest loan amounts — up to $200,000 — of any Credible partner lenders. Simply put, if you need an unsecured personal loan over $100,000, there are very few places to look, but BHG is one. You'll have up to 10 years to repay the loan, but you'll need an annual income of at least $100,000 to qualify and a FICO score that's 660 or higher. However, if you have a cosigner that meets these requirements, BHG will consider your application.
Loan amounts start at $20,000, so look elsewhere for small loans. And BHG charges a modest origination fee between 2% and 4%, depending on your financial profile. Loan funds are available within three to 14 days of loan approval. Note that you can't prequalify with BHG.
Fees
Origination fees, late fees
Eligibility
Available in all states except Maryland and Illinois
Loan uses
Debt consolidation, baby (adoption), engagement ring financing, moving (relocation), business, home improvement, special occasion, cosmetic procedures, major purchase, taxes, credit card refinancing, medical expenses, vacation, wedding, other
Read full reviewFees
Origination Fee, $15 Late Fee, $25 NSF Fee
Eligibility
Available in all states except CO, CT, ME, NV, NH, TN, VT, WV, WY, and all U.S. Territories
Time to get funds
Funds typically deposited into your account in 1 business day13
Loan uses
Debt consolidation, credit card refinancing
Read full reviewOverview
OneMain Financial has multiple options for bad-credit personal loans. There is no minimum credit score required (if you apply directly with OneMain), which means you could get a loan with bad credit (FICO below 580). Plus, cosigners are allowed — a cosigner is someone (ideally, with good credit) who promises to repay the loan if you can't, which can make it easier to qualify or lower your rate. And, secured personal loans are available. You secure a loan with collateral, which may also help you qualify or lower your rate.
Rates are higher than competitors and OneMain charges origination fees as either a flat fee up to $500, or a percentage from 1% to 10% (depending on your state of residence). Note that even if you prequalify for a personal loan with OneMain, getting approved isn't a given.
Fees
Origination fee, unsuccessful payment fee, late fee
Eligibility
Must have photo I.D. issued by U.S. federal, state or local government
Time to get funds
As soon as 1 to 2 days after acceptance
Loan use
All except business, and education
Read full reviewLearn More: Best Personal Loans for Borrowers With Good Credit
Debt consolidation loan alternatives
A debt consolidation loan isn’t the only way to tackle your debt — and in some cases, it’s not a realistic or helpful option. Below are a few alternatives you may want to consider.
- Balance transfer card: A balance transfer credit card allows you to combine credit card balances onto another card — for a fee. If you can qualify for one, your card could come with an introductory period of 0% interest, which can be extremely valuable if you can aggressively pay down your balance in that time. Keep in mind the APR will likely jump up dramatically at the end of the introductory period.
- Home equity line of credit (HELOC):A HELOC allows you to borrow against the equity you have in your home, making it a secured line of credit. If you have significant equity in your house, this could be a good option. Because HELOCs are secured, they tend to have lower rates than personal debt consolidation loans, but you risk foreclosure if you miss payments.
- Debt management plan: A debt management plan involves working with a nonprofit credit counseling agency. Typically, a debt management plan is for people who want professional help getting a handle on their debt. With a debt management plan, the agency will create a payoff plan, negotiate your interest rates, and handle the payments to your creditors in exchange for a small fee.
Related: Debt Consolidation vs. Balance Transfer
FAQ
Can I consolidate all types of debt?
Generally, you can consolidate all types of debt. Typically, however, debt consolidation makes the most sense for high-interest debt, like personal loans and credit card debt. Some types of debt consolidation loans may have limits on how you can use them — for instance, most lenders prohibit using personal loans to pay off student loans.
Can I still use my credit cards after consolidating my debt?
Usually, you can still use your credit cards after consolidating debt. But if you enroll in a debt management plan, you probably won’t be able to use your credit cards. Debt management plans typically require you to stop taking on debt while in the program. In exchange, these plans typically offer lower interest rates on your behalf.
How long does it take to pay off debt through consolidation?
The amount of time it takes to pay off your debt through consolidation completely depends on your financial situation. The following factors play into it: the amount of debt you have, your interest rate, and the size of your monthly payment. The more debt you have, the higher your interest rate, and the smaller your monthly payment, the longer it will take to pay off your debt through consolidation.
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Meet the expert:
Emily Batdorf
Emily Batdorf is a personal finance expert, specializing in banking, lending, credit cards, and budgeting. Drawing on her scientific background, she's developed a knack for analyzing financial products in the context of different needs. She finds joy in helping readers understand their best options and shuns a one-size-fits-all approach.