What is a Debt Consolidation Loan?

By Michelle Lambright Black MONEY RESEARCH COLLECTIVE

Updated March 26, 2026 5:42 AM

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A debt consolidation loan is a type of financing you can use to consolidate multiple high-interest debts into a new loan. With a good or excellent credit score, a debt consolidation loan could offer you the chance to save money and perhaps speed up the debt repayment process. According to the Federal Reserve’s consumer credit report, the average APR on credit card plans at commercial banks was 20.97% in 2025 Q4, while the average rate on 24-month personal loans was 11.65%—which shows why a lower-rate consolidation loan can sometimes reduce interest costs.

If you’re trying to figure out how to pay off debt faster, debt consolidation is a strategy that’s worth considering. But it’s critical to manage the process wisely for a debt consolidation loan to work in your favor instead of leading to future problems.

What is debt consolidation?

Debt consolidation is the process of taking several debts and combining them into one monthly payment. By rolling multiple consumer debts together, those financial obligations may become easier to afford, budget for and manage.

People use debt consolidation to handle many different types of consumer debts, including:

Credit cards
Retail store credit cards
Student loans
High-interest personal loans
Medical bills

Not every debt is a good fit for consolidation: secured debts like mortgages and auto loans are typically handled separately, and some lenders may not allow certain balances or past-due accounts to be paid off with a new loan.

What debt consolidation does — and doesn’t — mean

Debt consolidation doesn’t mean that you stop owing money; it simply changes both the identity of the institution you owe money to and the terms of repayment. The debt consolidation process can often help consumers save money – but this benefit isn’t a given. When you consolidate your debts, it’s important to secure a lower interest rate than the annual percentage rate you’re paying on your current debts. If you can’t lock in a lower loan rate, or if you take longer to pay your debts after combining them together, debt consolidation might actually cost you more in the long run. It’s also smart to compare the “total cost” (interest plus any fees) and the payoff timeline, not just the monthly payment.

Types of debt consolidation

There are several ways to consolidate your debts. Four of the most common types of debt consolidation are debt consolidation loans, balance transfer credit cards, student loan consolidation, and debt management plans (DMPs).

Debt consolidation loans are typically unsecured personal loans you can use to pay off existing debts. Secured options—like home equity loans or home equity lines of credit (HELOCs)—can also be used for debt consolidation at a lower rate, but they put your home at risk if you can’t repay. (For homeowners with strong equity and high-interest balances, that tradeoff can make sense if it helps combine multiple debts into one payment and lowers overall borrowing costs.). These installment loans often feature a fixed interest rate and fixed payment throughout the life of the loan.

Balance transfer credit cards are another form of debt consolidation. With this strategy, you can use a new credit card (perhaps with a promotional low or 0% APR on balance transfers) to pay off existing debts and potentially save money in the process. Just be sure to account for a balance transfer fee (often charged as a percentage of the amount transferred) and the end date of the promotional APR; your rate can jump after the promo period.

Student loan consolidation lets you replace your original student loans (federal or private) with a new, larger loan. You should be cautious about refinancing federal student loans with a private lender, however, since you could lose federal loan benefits. Parent PLUS borrowers should know that the U.S. Department of Education ended the “double consolidation” loophole on July 1, 2025, so borrowers who didn’t complete that process before the cutoff generally can’t newly use that strategy.

Debt management plans, or DMPs, can help you combine and lower debt payments without a new loan (especially if you have negative entries on your credit report). With a DMP, a credit counseling agency negotiates with creditors on your behalf to try to reduce or pause interest, lower monthly bill payments, and waive fees. But there are risks: creditors such as credit card companies may close your accounts and you may have to make monthly payments to the credit counseling agency for three to five years. If you’re considering a DMP, look for a reputable nonprofit credit counseling organization, ask for fee disclosures in writing, and be cautious of companies that promise quick fixes or guaranteed results.

How does debt consolidation work?

The steps you take on your debt consolidation journey may vary depending on the approach you choose and which company you opt to work with during the process. Getting a debt consolidation loan, for example, is quite different from working with a credit counseling agency to set up a debt management plan with your creditors.

If you choose to work with a lender or credit card company to combine existing debts into a new account, it’s important to always pay your new monthly payment on time. Your new lender or card issuer is likely to report any late loan payment to the credit bureaus, and such actions could damage your credit score.

It’s also critical to avoid taking on new debt (especially credit card debt) after consolidating. Otherwise, you risk increasing your debt-to-income ratio and putting yourself in a worse financial situation in the future.

How do I get a debt consolidation loan?

A debt consolidation loan has the potential to help you lower your debt when you manage the process responsibly. If you’re considering this type of debt management strategy, it’s a good idea to start with a little research.

First, find out where your credit stands. The condition of your credit will have a big impact on your options and loan approval odds. (Tip: If you have bad credit or credit errors, you can work to improve your credit score on your own or search for trustworthy credit repair companies to help you.)

Once your credit record is in hand and you’re ready to apply for a consolidation loan, it’s time to shop around for a good deal. Before comparing offers, calculate a target loan amount (your eligible balances) and the APR you’d need to come out ahead after fees. You’ll want to compare loan offers from different lenders and pay attention to details like:

APR
Fees
Repayment terms
Maximum loan amount

Apply for debt consolidation

After you feel confident that you’ve found the right lender for your situation, you may be ready to apply for a debt consolidation loan. A lender will likely perform a hard credit check when you fill out an official loan application. But you might also be able to see if you prequalify for a debt consolidation loan with only a soft credit inquiry. Keep in mind that “prequalification” isn’t a guarantee of approval, and your final APR can change after the lender verifies your income, debts and credit with a hard inquiry.

Is debt consolidation a good idea?

A debt consolidation loan may be helpful to consumers who want to lower the interest rates they’re paying. People who want to simplify their monthly budget by reducing the number of outgoing payments may appreciate debt consolidation solutions as well. Also, combining multiple loans into a single account might protect your credit score.

However, debt consolidation isn’t right for everyone. If you struggle with overspending on credit cards, for example, debt consolidation may provide a temporary band aid to the problem. If you keep charging more on credit cards than you can afford each month, your debts will continue to grow.

You should only move forward with debt consolidation if you’re confident that you can avoid overspending in the future. Otherwise, those habits could lead to more debt than you can handle, bad credit, and other potential problems in the months and years to come.

Does debt consolidation hurt your credit?

A new debt consolidation loan has the potential to help your credit score in several ways.

Payment History: 35% of your FICO Score comes from your payment history. So if you open a new debt consolidation loan and always pay on time, it could help you establish good credit history in the future.
Credit Utilization Ratio: The amount of debt you owe impacts 30% of your FICO Score, and your credit utilization rate is a big part of the equation here. Credit utilization describes the relationship between your credit card balances and limits. When you pay down or even consolidate credit card balances, your credit utilization rate should decline. Lower credit utilization can be good for your credit score.
New Credit and Inquiries: Applying for a new loan can cause a small, short-term dip in your score due to a hard inquiry and the addition of a new account.

Of course, the final impact that a debt consolidation loan has on your credit score will depend on you. If you make late payments on your new loan or take actions that increase your credit utilization rate (i.e., getting into more credit card debt, making just the minimum payment or closing credit cards that reduce your available credit), your credit score might go down instead of improving in the long run.

Debt consolidation programs

Getting a new debt consolidation loan or balance transfer credit card is one way to try to consolidate your debts. Yet if you have bad credit or other obstacles that could make you ineligible for these types of financing, you might want to consider other debt consolidation options, like debt relief or debt settlement. Unlike a consolidation loan, debt relief generally doesn’t require you to qualify for new credit. Instead, debt settlement companies typically try to negotiate with creditors to reduce the amount you owe on unsecured debts, though the strategy can be risky and may damage your credit.

Free government debt consolidation programs

Credit counseling organizations typically charge fees for their services, including debt management plans. However, you might be able to find free or low-cost services through local credit unions, nonprofit organizations, or religious organizations. Be cautious of any company that claims it’s part of a “government debt consolidation program,” pressures you to sign immediately, or promises to erase your debt quickly—those are common red flags for scams.
Military financial assistance is available through the Servicemembers Civil Relief Act (SCRA) to help active-duty military service members with certain financial challenges. Under the SCRA you may have the right to ask creditors to lower your interest rates, delay foreclosure proceedings, and more.

This story was originally published March 21, 2025 at 11:53 AM.