Debt Consolidation Loans: Pros, Cons and How to Qualify

If you have several high-interest debts — especially credit cards — a debt consolidation loan can help you pay less interest and have one monthly payment. But it isn’t magic: it only works if you change the habits that created the debt.

What is a debt consolidation loan?

It’s a personal loan you use to pay off all your other debts at once. From then on you only owe the loan, with:

• a fixed interest rate, ideally lower than your cards;
• a fixed monthly payment;
• a clear payoff date (for example, 36 months).

Real example: $10,000 in credit card debt

Say you owe $10,000 on cards with an average APR of 24%, and you’re offered a consolidation loan at 13% APR for 36 months.

• Monthly loan payment: about $337.
• Total loan interest: about $2,130.

If instead you keep paying the same $337 a month on your 24% cards:

• it would take 46 months (almost 4 years);
• you’d pay about $5,320 in interest.

You save about $3,190 and finish 10 months sooner — with the same monthly payment.

Pros

• Less interest, if you get a lower rate than your current debts.
• One payment: fewer due dates to track and less risk of missing one.
• A fixed end date: you know exactly when you’ll be done.
• It can help your score: paying off cards lowers your credit utilization.

Cons and risks

• Origination fees: many loans charge 1% to 10%. Include it in your math (see personal loan vs. credit card for how it affects the cost).
• Long terms: a longer term lowers the monthly payment but can mean more total interest.
• Using the cards again: the biggest danger. If you run them back up, you’ll owe the loan and the cards.
• If your credit is weak, the rate you’re offered may be no better than what you already pay.

How to qualify and get a good rate

1. Check your credit report and fix errors before applying (see how to dispute a credit report error).
2. Know your debt-to-income ratio. Lenders look at how much of your income goes to debt.
3. Prequalify with several lenders. Banks, online lenders and credit unions, which often have lower rates. Prequalification uses a soft inquiry that doesn’t affect your score.
4. Compare APR and total cost, not just the monthly payment.
5. Once approved, pay off the debts right away. Some lenders pay your creditors directly.

Alternatives to consolidation

• 0% balance transfer card: if your debt is moderate and you can pay it off in 12–21 months. See how balance transfer cards work.
• Debt avalanche or snowball: no new loan, just paying in order (guide here).
• Nonprofit credit counseling: they can help with a debt management plan.

Watch out for “debt settlement”: it’s not the same as consolidation. Those companies ask you to stop paying so they can negotiate a discount, which can seriously damage your credit, and many charge high fees.

FAQ

Will a consolidation loan lower my credit score? It may dip slightly at first because of the hard inquiry and new account. With on-time payments and zeroed-out cards, it usually rises over time.

Should I close my cards after consolidating? Not necessarily — closing them can raise your utilization. If they have no annual fee, keep them and don’t use them.

Can I consolidate student loans? There are specific programs, but be careful with U.S. federal loans: refinancing them into a private loan means losing protections such as income-driven repayment.

This article is for educational purposes only and is not personalized financial advice. Example figures are illustrative; actual rates depend on your credit and the lender. Read our Disclaimer.