How to Consolidate Personal Loans: Steps and Tips

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Edited byAmy Wilder
Edited byAmy Wilder

Updated: July 25, 2023

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Debt consolidation combines multiple debts into one single loan. You can consolidate debts like student loans, credit cards and personal loans. Consolidation grants an opportunity to get a lower interest rate, a longer repayment term and the chance to eliminate debt faster.

While this may sound tempting, there are a few important factors you should consider before consolidating debts. A thorough understanding of how and when to consolidate loans will help you find the right option for your needs.


What Is Debt Consolidation and How Does it Work?

Debt consolidation involves taking out a new, large loan to pay off multiple debts. You might want to consolidate personal debts for several reasons, such as getting a better interest rate, reducing monthly payments, paying only one payment a month or even improving your credit score.

Banks, credit unions and online lenders offer debt consolidation options in the form of personal loans, home equity lines of credit (HELOC) or credit card balance transfers. However, depending on the lender, the new loan may come with stringent requirements. Lenders look at factors like your credit history and financial status to determine if you can repay a consolidation loan.

If you qualify, know that consolidating your debt may also come with certain fees, depending on the lender. For instance, a balance transfer credit card may come with a balance transfer fee to move your debt from one card to another. Other typical fees for consolidation loans include origination, application, late payment and early payment fees.

Pros and Cons of Consolidating Personal Loans

Consolidating debt comes with advantages and disadvantages; it’s important to weigh the pros and cons to make the right decision for you.


Ways to Consolidate Personal Loans

There is more than one way to consolidate debt. For instance, you can use a credit card balance transfer, tap into home equity or get a new personal loan to consolidate debt.

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Transferring a credit card balance involves taking out a new card and getting approval from the lender to move the balance. You can do this with several cards at the same time.

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If you have a home and have built equity, there are three ways you can utilize that to consolidate other debts you may have. You can do so through a home equity loan, a home equity line of credit (HELOC) or a cash-out refinance.

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A personal debt consolidation loan is simply a personal loan. Personal loans are generally unsecured, and your loan amount, creditworthiness and income all play a role in determining your annual percentage rate (APR).

How to Consolidate Personal Loans

If you think that consolidating personal loans is the right step for you, there are a few steps you can take to get started.


Collect and organize your debts

List the debts you want to consolidate, including your current balances, interest rates and terms for each one. This gives you a good idea of how much you need to borrow and what an ideal interest rate is.


Choose a debt consolidation option

Decide how you want to consolidate your loan, whether through a balance transfer, a personal loan or by tapping into your home’s equity.


Compare loan offers

Gather quotes from several lenders and find an ideal option for you. Try to strike a balance between a low interest rate and a manageable repayment term.


Complete and submit the application

When you’ve decided on a lender, complete and submit the application for your loan. This can typically be done online, but some loans may require a phone call or in-person visit.


Create a budget and repay the loan

If your application is approved, add the monthly repayment to your budget. Once you get the funds, start repaying the loan according to the terms.

Is Debt Consolidation Right for You?

While debt consolidation can be beneficial, it may not suit everyone. Understanding when it is and isn’t a good idea can help you make the right decision and avoid unnecessary debt.

When Consolidating Is a Good Idea

  • If your credit score has since improved: If your credit has improved since you last took out your loans, you may qualify for better rates or terms.
  • If you need to cut down on the number of loans you’re managing: If the number of payments you need to make monthly becomes difficult to manage, consolidating your debt may make repayments easier.
  • If you want better terms: If the interest rates on your debts combined are too high or your repayment terms are unfavorable, consolidating your debts may help.
  • If you want a lower monthly payment: Combining multiple debts into one may help you get a lower monthly payment — which can help if you’re struggling to repay the minimum on multiple loans.
  • If you have several high-interest loans: If all your loans have high interest, it might be beneficial to consolidate them and have only one loan and interest rate to manage.

When Consolidating Is a Bad Idea

  • If your credit score has not improved: A low credit score could make a consolidation loan offer come with higher rates or worse terms, which could lead to paying more interest in the long run.
  • If you cannot pay for your new loan: If the terms and interest rate you get lead to a monthly payment you can’t afford, then consolidating may not be a good idea.
  • If the interest rate offered is high: A high interest rate can make debt consolidation counterintuitive, as it may lead to higher monthly payments and more interest paid over time.

FAQs About Consolidating Personal Loans

We have answered some questions below that you may have about consolidating personal loans.

Is debt consolidation the same as debt settlement?
How will debt consolidation affect your credit?
What is the difference between a personal loan and a consolidation loan?
How long does debt consolidation stay on your record?
Is using a personal loan to consolidate debt a good idea?
Does debt consolidation close your accounts?
What happens when you stop paying a debt consolidation loan?
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The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.