How a personal loan to consolidate debt works and how you get one

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by Ashley Barnett

edited by Deborah Kearns

Updated July 18, 2024

In a nutshell

Personal loans can be a good option for debt consolidation if they lower your average interest rate and make your monthly payments more manageable.

You can use the proceeds from a personal loan to pay off your debts, resulting in only one monthly payment instead of several.
Look for a loan with a low interest rate, payments you can manage and few fees.
Get prequalified for several loans to compare offers.

What is debt consolidation?

Debt consolidation is when you use a new loan to pay off existing loans. Generally, the purpose is to have fewer monthly payments and, ideally, a lower average interest rate and monthly payment.

Are personal loans good for debt consolidation?

Personal loans may be a good option for debt consolidation. If you are paying higher interest rates than you would on a personal loan, then you could lower your overall interest rate by taking out a personal loan and using it to pay off higher-interest credit cards or loans.

Also, consolidating your debts with a personal loan may lower your monthly payment, which is helpful if your current minimum payments are higher than you can manage. Plus, having one payment to manage each month can streamline your finances and reduce a lot of stress.

However, consider alternatives if you can't qualify for a lower rate with a personal loan.

Another thing to watch out for is avoiding taking on more debt after the personal loan has cleared your existing loans. Creating available credit on existing lines of credit and a little wiggle room in your budget may provide a temptation to spend more.

Before you consolidate your debt, address the circumstances that led to the current debt situation.

Pros:

Fewer monthly payments.
Potentially lower interest rate.
Potentially lower monthly payments.
May lead to more debt in the end if lines of credit are freed up.

Cons:

May take longer to pay off the debt.
May pay more interest over the life of the debt.
May require upfront fees.

How do I get approved for a personal loan?

First things first: Understand your current financial situation. You'll want to know how much you need to borrow and your desired monthly payment. Knowing the interest rates on your current debts will also help you choose a loan with a lower annual percentage rate, or APR, than you are currently paying.

Next, check your credit. A higher credit score will get you a better interest rate, but don't worry if your credit is less than perfect. Even borrowers with less-than-stellar credit can be approved for the best personal loans. However, knowing your credit score allows you to choose the loan that's best for you.

Once you know what you need and your credit score, you can get prequalified with a few lenders. This is a soft credit check and it will let you compare several loans to ensure you get the best possible deal.

When you've decided which loan is the best for you, you'll need to apply with your chosen lender. You may need the following information:

Name.
Date of birth.
Social Security Number.
Contact information and address.
Employment and income information.
Monthly housing payment.
Loan amount requested.
Purpose of the loan.

Employment and income information may include W-2s and past tax returns. You may also be asked to provide payoff information for the loans you are consolidating.

Lastly, you'll be given the final details of your new personal loan, which may vary slightly from your prequalification information. Look this document over carefully. If you are satisfied, sign the documents and your loan will be funded per the terms of the agreement.

What to look for when comparing personal loan options

You'll want to look at a few factors when getting a personal loan: the interest rate, the loan term and the fees.

The interest rate will determine how much interest you will pay. Of course, the lower the rate you can acquire, the better. A lower rate will mean less interest accrues each month. This, in turn, means that more of your payment will go toward reducing your balance.

The loan term is how long the loan will take to pay off if you make the minimum payment each month. The longer the loan term, the lower the monthly payment will be. However, you will also pay more interest over the life of the loan.

Loan fees may take many forms. The origination fee is common and is the fee the lender charges to process your loan and is calculated as a percentage of the loan amount, typically between 1% and 6%. Late fees are another common fee you might pay if you don't make your payment on time. This ranges from $25 to $50.

Some uncommon fees to watch out for are an application fee, payment processing fee or a prepayment penalty. If you see these fees, keep shopping around.

Alternatives to debt consolidation loans with a personal loan

If a personal loan isn’t up your alley, there are a few alternatives.

Credit card balance transfers

Credit card balance transfers can be a great way to consolidate existing debt. Many cards offer 0% APY introductory offers for new customers in which interest doesn’t accrue on the card for a period of time, sometimes up to 21 months.

This gives you an excellent opportunity to pay down the debt, as all of your payments will be going toward the balance. Here are some of the best balance transfer cards on the market.

The downside of credit card balance transfers is that you may not be able to consolidate all of your debt onto one card. If your existing debt exceeds the credit limit you were approved for, you may end up adding another monthly payment to the mix, which you may be hoping to avoid.

Home equity loan or line of credit

If you own your home and have some equity built up, then a home equity loan or line of credit might be a good option.

Home loans typically have lower rates than unsecured consumer debt, so you'll likely be able to lower your average APR. They also have longer terms, potentially up to 30 years, which may also lower your monthly payment. Here are the best home equity loans today.

The drawback is that your home serves as collateral against the loan, meaning the bank can foreclose on your house if you fail to repay the loan.

Also, extending the term of the loan will lower the payment, but it will keep you in debt longer if you only make the minimum payments. If you choose this route, make a plan to pay the loan off quickly.

The AP Buyline roundup

A personal loan may be a good option for consolidating debt. First, understand your current situation and then look for a loan with a lower interest rate than you currently pay. Also, pay attention to personal loan fees, such as an origination fee and late fees. Lastly, devise a plan to pay off the debt and avoid spending more by using any lines of credit that were freed up during the consolidation.

Frequently asked questions (FAQs)

What is the difference between debt consolidation vs. debt relief?

Debt consolidation is getting a new loan and using the proceeds to pay off your existing debt. This results in one monthly payment, which is easier to manage. Debt relief is when you hire a company to settle your debt for less than you currently owe.

Can I get a loan to consolidate my debts?

Yes, you may be able to get a personal loan to pay off your current debts.

Does debt consolidation hurt your credit?

It might. For starters, getting a new line of credit or loan will result in a hard credit check, temporarily lowering your score a little bit. The new loan will also affect your credit utilization score. A utilization score is the relationship between available credit and debt. For example, a credit card with a $1,000 credit limit and a $300 balance would have a 30% utilization score.

If the new loan increases your utilization score, your credit could be negatively impacted. But if it lowers the utilization, then it may actually have a positive effect. Ultimately, over time, how effective you are at making timely payments will have the biggest impact. Late or missed payments will negatively impact your score, while a history of timely payments will increase it.

What type of loan is best to consolidate debt?

The best loan is one that lowers your interest rate and has payments that you can comfortably manage. Credit card balance transfers are a popular way of paying debt down quickly because they offer a 0% APR for a period. If you have a larger debt balance to consolidate, though, a personal loan might provide the credit access you need to consolidate debt.