What is debt consolidation and how does it work?

Whether you owe more or less than the average, managing your debt can feel overwhelming, especially if you’re juggling multiple monthly payments.

Debt consolidation can make it easier to deal with your debt, and it might enable you to get out of debt sooner or save on interest costs. Here’s how debt consolidation works and the different methods you can use to consolidate multiple balances. 

A personal loan is one tool that you can use to consolidate high-interest debts. Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.

Debt consolidation is the process of combining two or more debts into one account. You can usually do this with a single loan, which you’ll then use to pay off your current balances. A debt consolidation loan can pay off a handful of select accounts or even satisfy all the debt that you currently hold. 

Any paid accounts will be cleared or closed out, and you’re then responsible for repaying the debt consolidation loan as agreed. 

With a debt consolidation loan, you can:

In some cases, you might be able to accomplish all of the above.

You can consolidate your debt in several different ways. Here are a few of the most common options.

You can find personal loans offered by banks, credit unions, and online lenders. They provide a single lump sum of cash, which you can then use to pay off existing debt (or whatever else you need). Personal loans are installment products, so you repay them over a set period of time with fixed monthly payments. 

Pros

Cons

Visit Credible to compare personal loan rates from various lenders, without affecting your credit.

Balance transfer credit cards allow you to move balances from one credit account to a new credit card account. If a new card offers a lower interest rate — or even an introductory 0% APR for a certain period of time — shifting balances over can save you a lot of money on your credit card debt.

Pros

Cons

Your retirement account might be the single largest pool of savings you own. Accessing these funds with a 401(k) loan may be one quick way to consolidate and clear out some debt. But it’s rarely the best choice, and not all employers permit 401(k) loans. 

Pros

Cons

A debt management plan (DMP) is a strategy put in place by a nonprofit credit counseling agency. A credit counselor will negotiate with your creditors on your behalf. You’ll make one monthly payment to the credit counseling agency, and the agency will pay your creditors for you. A debt management plan isn’t a loan, but it can make getting out of debt more manageable.

Pros

Cons

Here are some situations when debt consolidation can make the most sense.

Rather than juggling multiple payments and due dates each month, consolidating your balances can result in one single payment with one single due date.

If you have good credit, you could qualify for a low-interest loan with a competitive rate, which may be much lower than you’re paying on other debts, such as credit cards. This can save you a lot of money in interest over time.

Debt consolidation can clear out balances on your revolving accounts, which could make it tempting to begin spending again and racking up additional debt. If you’re committed to getting out of debt and focused on meeting your financial goals, then debt consolidation can be a solid strategy.

If you’re ready to apply for a debt consolidation loan, Credible makes it easy to compare personal loan rates so you can find one that meets your needs.

As with any financial strategy, debt consolidation doesn’t make sense for everyone. Here are some times when you might want to reconsider consolidating your debt. 

Debt consolidation is a great strategy for repaying various balances, but it can come at a cost. If you only have a small amount of debt, consider whether another strategy (such as the debt snowball or debt avalanche) could be better, rather than paying personal loan origination fees or balance transfer credit card fees. 

If you’re trying to get a credit card or personal loan with bad credit, you might not qualify for an interest rate that’s lower than the one you’re paying on your existing debts. If you can’t snag a lower interest rate or introductory balance transfer offer, consolidating your debt might not be worthwhile.

When you’re in debt, you may dream about clearing out your outstanding balances. But once you do, the temptation of that $0 balance can sometimes prompt new spending. 

If you feel that you might be tempted to rack up those balances again, reconsider whether or not you should consolidate.