What Is Debt Consolidation?

Posted May 9, 2018 2:29 p.m. EDT
Updated May 15, 2018 6:00 p.m. EDT

Dealing with multiple personal debts might feel a lot like playing whack-a-mole – different bills with different due dates, minimum balances and late fines and penalties. Just when you’ve sent in one payment, another bill pops up. It’s easy to see how people get behind when repaying multiple debts overwhelms them. Debt consolidation can help by essentially rolling all your debt payments, most often credit cards, into one with a single due date and an interest rate that is often lower than what you are currently paying.

In this guide, we’ll cover:

What is a debt consolidation loan?

How does debt consolidation work?

What types of debt can I consolidate?

Which loans can be used to consolidate debt?

Learn More:

When does debt consolidation make sense?

Where can I find the best debt consolidation loans?

How does debt consolidation affect your credit?

How to make debt consolidation work for you

Debt Consolidation: Understanding the Basics

When choosing the right type of debt consolidation, there are two primary ways to concentrate debt payments into one bill: transferring debt to a 0% balance transfer credit card, or loans.

What is a debt consolidation loan?

In many cases, debt consolidation loans offer lower interest rates and extended terms compared with your current payments. People typically choose to consolidate debt to simplify their finances or to save money on interest payments. Borrower beware: Upfront fees or temporary terms could eat into that savings. Plus, consolidating debt without a plan to address the behavior that got you into trouble in the first place may actually exacerbate your debt if new lines of credit tempt you to start spending again.

How debt consolidation works

When you obtain a debt consolidation loan, you receive a lump sum to pay off your existing debts. Then, instead of juggling multiple payments, you can focus on making the one new loan payment. “You essentially take multiple loans that might be causing confusion with different interest rates and different terms, and roll them into a single loan, which leaves you with one single payment needing to be made,” said Todd R. Tresidder, money coach at

What types of debt can I consolidate?

Debt consolidation can be used to simplify almost any type of unsecured consumer debt. This includes:

“Though debt consolidation is most often used for credit cards, there’s not a boundary line. You could consolidate pretty much any type of loan that you have,” Tresidder said.

Which loans can be used to consolidate debt?

Based on LendingTree data (our parent company), personal loans are the most popular option for debt consolidation. There are companies that specialize in debt consolidation loans, or you may choose to work with your preferred local bank or credit union. To make it easier for you, we’ve compiled a list of the best personal loans for debt consolidation. You can view that list here!

One caveat: You will need good credit to ensure you’re able to obtain a loan with better rates and terms than your existing debt.

Note: If you have a credit score less than 640, struggling to make monthly debt payments and would like to explore your options to reduce your debt by up to 50%, then please click here.

Depending on your unique needs and situation, there are different loan products that can help you consolidate and streamline your debt payments. View our guide on choosing the right debt consolidation method to get a better understanding of the options available for you.

Where can I find the best debt consolidation loans?

Since achieving a lower interest rate and better terms are imperative when consolidating debt, comparing offers is essential. Since this will require that the lender do a credit check, be sure to get all your shopping done within 45 days. Multiple hard credit pulls outside of that time window can be damaging to your FICO credit score.

Online lending marketplaces such as LendingTree simplify the process by enabling you to see offers from multiple lenders. Local financial institutions are another place to start shopping for debt consolidation loans. “The familiar is good if you have a credit union or a trusted bank. Start there just as your comparison point before you start looking at … companies online,” Dlugozima said.APR5.99%To35.99%Credit Req.Minimum 500 FICO

Minimum Credit Score

Terms24 to 60


Fees Varies


on LendingTree’s secure website

LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, personal loan offers within minutes. Everything is done online and you can have your loan pre-approved without impacting your credit score. LendingTree is not a lender, but their service connects you with up to five offers from personal loan lenders.

Dlugozima advised contacting the National Foundation for Credit Counseling’s referral service. “They have stringent industry standards, so you will be referred to a legitimate nonprofit organization that can help you choose the best approach.”

When does debt consolidation make sense?

Read the fine print, Sokunbi said, since some debt consolidation products have terms that may be temporary. “People should be mindful of whether there are any penalties or fees or if you’re going to lose any special perks or be charged any fines,” Tresidder added. “You also have to find out from the company offering the bulk loan what types of loans they will allow to be consolidated.”

Don’t dig a deeper hole. Most importantly, consumers should examine their budgets to determine whether they can comfortably afford the new monthly payment. “Do not add insult to injury when you’ve already got a debt problem,” said Tresidder. “The fact that you’re a debtor shows that you lack financial savvy to begin with, so do extra due diligence and recognize that you’re trying to solve a problem and you don’t want to make it worse.” Make sure to get the lowest interest rates possible. Shopping around to find the best offer will save you money in the long run.

Calculate your loan payments and how long it will take to repay your debts using LendingTree’s debt consolidation loan calculator. LendingTree is the parent company of MagnifyMoney.

When is debt consolidation a good idea?

Chris Dlugozima, education specialist with GreenPath Financial Wellness, said that debt consolidation is ideal for individuals with a reasonably good credit score who have an isolated reason for having fallen behind on their debts. “A debt consolidation loan can make sense for someone who has identified the cause of why their debt has crept up and has already addressed that. Like, ‘I lost a job, but now I’m back at work.’ Or, ‘I was overspending, but now I’ve had some success following a budget and I’m confident I won’t get back into that situation,’” he said.

It may be a necessity for others, a lifeline for those in danger of falling behind on bill payments. “If you’re in a situation where you can’t make your payments and the lower interest rate, and the extended terms allow you to make your payment so you don’t go into default, then that helps as well,” said Tresidder.

When is debt consolidation a bad idea?

A certified credit counselor might recommend a debt-management plan as an alternative to debt consolidation for those with significant debt, or for people who are struggling to address the root cause of their debt.

“If you’ve ever tried to shovel in a blizzard, it might feel like you’re accomplishing something, but are you?” said Dlugozima. Debt consolidation can often feel the same way. “You get a sense of relief that you’ve solved a problem when you maybe haven’t.” When existing debts are paid off with a debt consolidation loan, some consumers may start feeling comfortable and become tempted to let those debts creep back up again, especially with credit cards.

What’s your goal? Debt consolidation may even increase your financial burden if you don’t carefully review an offer. A lower monthly payment might be deceptive if the terms are significantly longer. “A lot of people think only in terms of monthly payments, but you’ve got to look at the total of what you’re paying. You might have a lower interest rate and a longer term, but effectively you’re paying a higher total cost,” Tresidder said.

If you aren’t focused on the end game of becoming debt-free, a debt consolidation loan might not be the best approach for dealing with existing debts. “If you’re just trying to avoid a creditor or shift your pay dates around, that doesn’t solve a problem, it just delays the inevitable,” Sokunbi said. She advised searching online or picking up a book on debt repayment strategies to start you off on the right foot. “They will talk you through the best approach to paying off this now consolidated debt, because that’s just Step 1 to getting yourself out of debt.”

How does debt consolidation affect your credit?

Consolidating debt with a loan can have both positive and negative effects on your credit score. “It’s very nuanced. It depends,” said Dlugozima. “If it’s done in a way that doesn’t allow additional debt to accumulate, it probably won’t immediately affect the credit until the debt gets paid down.”

The negative affects of debt consolidation on your credit score

If you close your accounts as they are paid off, that can be damaging to your score. Older accounts make for a better credit score; closing accounts means that your credit utilization ratio increases as your credit limit decreases, which also negatively impacts your score. On the flip side, if you continue to spend on the accounts you’ve paid off with your loan, your credit score can take a dive. “If you just pay the minimum balance on your debt consolidation loan and go back to those old zero-balance credit cards and start racking up debt, it’s going to negatively impact your credit,” said Sokunbi.

How debt consolidation can improve your credit score

Successfully paying off debt will most certainly have a positive effect on your score in the long term, as large debts and late payments can really bring your score down. “If you’re currently incurring penalties because you can’t make your payments and by consolidating you’re able to make your payments, clearly that’s going to help your credit score over time,” said Tresidder.

Alternative options to pay off debt

A debt consolidation loan is just one approach to consolidating debt. Depending on your unique needs and financial situation, another option might be preferable.

Balance transfer

Balance transfer is a popular approach to managing credit card debt. By transferring the balances on existing cards to a new card with a more attractive interest rate, consumers get the mutual benefits of simplified payments and cost savings. Many individuals take advantage of introductory offers of 0% interest for a certain length of time in order to make headway on their debt without the added expense of interest.

“You have to read the fine print and you have to understand the numbers. If you know you’ll be able to pay off the entire balance before the introductory offer expires, it can save you a significant amount of money,” Sokunbi said. “But once that introductory rate expires, it’s often much higher than where you are coming from.” Some 0%-interest credit cards also have severe penalties and rate increases if you miss a payment, so proceed with caution.

It is convenient to shop for a balance transfer credit card online with our list of the best balance transfer credit card offers.


  • Lower interest rate
  • Simplified payment schedule
  • Easy to shop online


  • Attractive rates are often for a limited time only
  • May have penalties and rate increases


Snowball versus avalanche. If you have the willpower to stick with a DIY debt repayment strategy, a debt snowball or debt avalanche approach might be right for you. With both approaches, you pay the minimum balance each month on all but one debt.

In a debt snowball, you pay all extra money toward the smallest debt until it is paid off and then move on to tackling the next smallest until all of your debts are gone. In a debt avalanche, you pay your debts off in order of their interest rate (highest first), which gives you the lowest mathematical cost of paying off the loan.

“One is focused on cost, but the other gives you the highest emotional satisfaction, because you can see those loans getting paid off quicker, which allows you to stick with it better,” said Tresidder. “One is financially the best solution and the other is emotionally the best solution. It’s going to depend on the individual, what they need to stick with the plan.”

>> Enter your debts into our Debt Snowball vs Debt Avalanche calculator to see which method is best for you!

Sticking to a budget is self-satisfying and free of fees. But, you need to be realistic about whether or not you have the determination to stay on task. In many cases, people who are already deeply in debt might not be equipped to make the most responsible financial choices.


  • No-cost option
  • Emotionally satisfying


  • May be difficult to stick with

Debt relief programs

When engaging with a debt settlement company, it is essential to first check their reputation. “You have to be very careful with these companies. They’re one of the top consumer complaints,” Tresidder warned. “But, there are people who have gone down the tube so far they’re completely desperate and this may be their only choice.”

With debt settlement, a company will negotiate your debts with your creditors on your behalf for a fee. Often, you pay the settlement company and they make your payments for you. In the process, they allow some of your accounts to go into default so your creditors will be more motivated to negotiate down the balances. “I would not go with any debt settlement company that tells you to pay them before they have a negotiated deal and before you begin payments directly on the amount,” Tresidder said.


  • Offers help for individuals in serious debt trouble
  • Provides strict payment schedule


  • Some companies in this space may use predatory practices
  • Can negatively impact your credit score
  • May result in legal ramifications if not done properly

How to make debt consolidation work for you

When deciding the best way to consolidate your debts, or whether a debt consolidation loan is the right step for you, first consider your financial habits and your commitment to make a change. “A debt consolidation [loan] is putting a Band-Aid on a problem. It’s not a solution. Debt consolidation is merely changing the terms of your loan to create a payment that’s easier for your situation,” Tresidder said.

As part of your debt consolidation efforts, consider speaking with a debt management planner or a credit counselor. “There are a lot of great non-profit ones that are actually there to support you and help you and guide you. When you meet with a legitimate credit counselor, you will have a budget, you will look at your credit report, you will analyze your debt and your options, and you will leave with a detailed written action plan,” said Dlugozima.

Most importantly, do your research. Shop around and find an offer that helps you streamline your payments and saves you money.

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