Debt Consolidation: How It Works and Whether It's Worth It

Debt consolidation means combining multiple debts into one loan or payment, ideally with a lower interest rate and one monthly due date.

• It’s best for borrowers carrying high-interest balances across multiple credit cards or unsecured loans, so long as the new rate, fees and payoff timeline improve their financial situation.

• It’s less ideal for borrowers who can’t qualify for more affordable financing. 

MoneyLion offers a service to help you find personal loan offers based on the info you provide, you can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms and fees from different lenders and choose the best offer for you. You can also use the loan funds to pay off other existing debts. MoneyLion is here to help.

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Key Takeaways

• Debt consolidation rolls multiple debts into one payment, ideally at a lower rate. It can simplify credit cards, personal loans and medical bills, though federal student loans and tax debt usually don't qualify.

• You only save money if your new rate beats your current average. Watch for origination fees, balance transfer fees and longer terms that can quietly erase the benefit.

• Consolidation works best with steady income and a real payoff plan. Without one, or if you keep adding new debt, it can leave you deeper in the hole.

• Most lenders want at least a 580 FICO score to qualify. Personal loan annual percentage rates (APRs) for consolidation typically range from about 6% to 36% depending on your credit.

• A new loan can dip your score before it helps it. A hard inquiry and lower average account age hurt short-term, but on-time payments build your history over time.

Summary generated by AI, verified by MoneyLion editors

What Is Debt Consolidation?

Debt consolidation brings multiple debts into one place. That way:

You'll have only one:

• Loan to manage

• Monthly payment to make

• Interest rate to track

Debts you can typically consolidate:

• Credit card balances

• Personal loans

• Medical bills

Debts you can't usually consolidate:

• Federal student loans

• Tax debt

• Child support

Debt consolidation effectively makes multiple loans with different due dates and interest rates easier to manage by combining them all into a single loan.

It can also save you money. When consolidating debts, you have a chance to secure a better interest rate, which can reduce the overall amount of interest you’ll pay over time. 

How Debt Consolidation Works

Here's how debt consolidation works: You apply for a new loan or balance transfer credit card, then use its proceeds or credit limit to pay off your other eligible outstanding debts, leaving you with just one monthly payment.  

Debt consolidation can have positive and negative effects, depending on how you manage it.

Ways To Consolidate Debt

There are a few different ways to consolidate your debt. The best option depends on your circumstances.

Personal Loans

You can get a personal loan from a bank or online lender to consolidate your debts. You can use these funds to pay off your existing debts, and then make regular payments on the personal loan instead.

Keep in mind, a new loan can dip your score before it starts to help.

Balance Transfers

Many credit card companies offer balance transfer options that let you move existing credit card balances to a new card with a low or 0% introductory interest rate for a set period. You make payments on the new card to consolidate your debts.

It’s important to compare debt consolidation loans vs. balance transfers, since the cheaper option depends on your rate, fees and payoff speed.

Home Equity Loans

If you own a home and have enough equity, a home equity loan may be an option to explore. These loans use your home value as collateral but have credit and income requirements to qualify.

DMP

These programs are typically offered by credit counseling agencies. They work with your creditors to negotiate lower interest rates or reduced monthly payments. You make one monthly payment to the credit counseling agency, which distributes the funds to your creditors.

Debt Consolidation Loans

Similar to personal loans, debt consolidation loans are specifically designed for consolidating debts. You apply for a loan from a bank or lender, and if approved, you use the funds to pay off your existing debts. Then you make regular payments on the consolidation loan.

Keep in Mind

These options have their pros and cons, so you’ll want to consider which one aligns best with your needs and goals. Take your time to explore each method and compare interest rates, fees and eligibility requirements. 

A Real Numbers Example: What You Could Actually Save 

Here’s what the math can look like if you’re able to consolidate your debts at more affordable terms. 

Imagine you’re currently paying off multiple balances at an average APR of 27.9%. You qualify for a three-year personal loan with a fixed 8% APR.

Assuming you were planning or able to repay your original debts over the same three-year term, here’s how costs compare:

In this example, debt consolidation would lower your monthly payment by about $150 and your total borrowing costs by close to $5,400.

Keep in mind that your savings will ultimately depend on the new loan's rate and term compared to your original loans and payoff plan.

How Long Until Debt Consolidation Improves Your Cash Flow?

Debt consolidation can improve your monthly cash flow as soon as your old balances are paid off and your new payments begin. Timing depends on your chosen method.

• Personal loan: Cash flow should improve alongside your first monthly payment if it’s lower than your previous payments.

• Balance transfer card: Interest savings may begin once the balances transfer.

• Home equity loan: Approval can take weeks, but you should feel relief once the loan closes and the new, lower monthly payment begins.

• DMP: Your payment may change and free up cash once creditors approve the plan, usually within a few weeks.

How Consolidation Affects Your Credit Score

For starters, it’s important to note that applying for a new debt consolidation loan is likely to generate a hard inquiry on your credit report. For most people, one additional hard inquiry can lower a FICO score by fewer than five points and the effect is typically temporary.

Plus, debt consolidation can affect other, more significant drivers of your credit score if you manage the new loan responsibly.

Overall, debt consolidation can affect these key credit score factors:

• Payment history: Considers whether you make payments on time and as agreed. It's one of the most influential factors in major credit-scoring models.

• Credit utilization: Looks at how much of your available revolving credit you're using. Paying down credit card balances with a consolidation loan may lower your utilization.

• Account age: Opening a new consolidation loan can lower the average age of your credit accounts.

• New or recent credit: Applying for and opening a consolidation loan adds a hard inquiry and a new account to your credit history.

The effect on each factor will vary based on your existing credit profile and how you manage the new loan. Over time, making on-time payments and keeping revolving balances low may help your credit, while missed payments and taking on additional debt can hurt it.

5 Benefits of Debt Consolidation

Debt consolidation can offer the following benefits.

1. Chance To Simplify Repayment

By consolidating debts, you combine them into a single payment. You only need to keep track of one due date and one interest rate, which can make it easier to stay organized and avoid missed payments.

2. Possible Lower Interest Rates

The potential to nab a lower interest rate for your debts is a huge perk. Certain types of debt, like high-interest credit card balances or payday loans, come with sky-high interest rates, which means you end up paying more money in the long run. But with debt consolidation, you have a chance to renegotiate and get a better deal.

3. Possibly Reduced Monthly Payments

Consolidating your debts can lower your monthly payment. For example, a lower interest rate could reduce what you owe each month. Extending the repayment term can spread out monthly payments over a longer period, which can also make them more affordable. 

Lower monthly payments can provide immediate financial relief and free up some of your budget for other expenses or savings.

4. Debt Payoff Strategy

Debt consolidation allows you to simplify your debt repayment strategy. Instead of feeling overwhelmed by multiple creditors, due dates and different interest rates, you can focus on a single loan.

You can create a clear plan to pay off your debt systematically. You can allocate your resources more effectively, pay down the debt faster and regain financial control.

5. Opportunity To Improve Your Credit Score

Debt consolidation can positively affect your credit score. It can lower your credit utilization ratio by increasing your available credit, potentially offsetting any negative impact from opening a new account.

Making timely payments on your new loan can gradually improve your payment history, which plays a big role in your overall credit score. However, you'll still have to demonstrate that you're responsible with your finances and be consistent with your payments to experience these benefits.

3 Potential Drawbacks of Debt Consolidation

Debt consolidation doesn’t automatically solve all your financial problems. It requires careful consideration, short-term planning and long-term financial discipline to ensure it’s effective. Here are some risks to consider.

1. Temptation To Accumulate New Debt

One drawback is the temptation to keep using credit cards or take on new loans without addressing the underlying spending habits and financial discipline issues.

If you fall into this trap, you might end up with even more debt than before, defeating the purpose of debt consolidation.

2. Extended Repayment Period

Debt consolidation can sometimes result in a longer repayment period compared to your original debts. While longer loan terms can lower your monthly payments, you may end up paying more overall due to the new loan’s extended duration.

It’s best to evaluate the trade-off between lower monthly payments and the total cost of extending your repayment period.

3. Potential for Higher Total Interest Paid

Depending on the interest rates and terms of the consolidation loan, you may end up paying more in total interest compared to your original debts — especially if you extend the repayment period or opt for a consolidation loan with a higher interest rate.

Again, it’s best to compare the total interest costs of your current debts with the projected interest costs of the consolidation option. 

When Not to Consolidate: Your Alternatives 

Debt consolidation may not work if you don’t have steady income, can’t qualify for affordable rates or terms on new financing or don’t want to risk the temptation of a new loan.

If that’s the case, you can consider these alternatives:

• Debt snowball method: This do-it-yourself strategy involves paying off your smallest balances first, while making minimum payments on all other balances, to get quick wins and reduce your total number of monthly payments. 

• Debt avalanche method: This alternative DIY strategy, which is an option when debts are still manageable, prioritizes balances by APR — highest to lowest — to potentially save you more on interest in the long run. 

• Budgeting without consolidation: Also an option if debts are still manageable, redrafting your budget to include expense cuts or new income streams could help you “find” more dollars to put toward existing debt payments. 

• DMP: If you can still make some monthly payment, but can’t qualify for new financing, you can pay a fee for a nonprofit credit counseling agency to negotiate a DMP with your creditors, usually repaid via one monthly payment to the agency over three to five years.

• Debt settlement: You can also hire a private debt relief company to negotiate with and pay off creditors on your behalf, though these programs are generally more expensive than DMPs and carry heightened credit score risks. 

• Bankruptcy: This legal process of reducing and restructuring your debts is a last-resort option for borrowers experiencing severe financial distress who can no longer reasonably expect to repay any or most of their outstanding balances.

Nonprofit Credit Counseling vs. a Lender: Which Is Best for You?

Factors To Consider Before Consolidation 

This cheat sheet can help you determine if debt consolidation is your best move. 

Good Candidate for Debt Consolidation If:

• You know your exact total debt amount.

• Your new rate is lower than your current average rate.

• Fees are reasonable — less than 5% for origination fees and around 3% to 5% for balance transfers.

• Your income is steady.

Take a Closer Look If:

• The new interest rate is the same or higher.

• Your repayment terms increase the interest you end up paying.

• Your new loan would unnecessarily extend your repayment term.

• The fees could zero out any savings you gain.

• Closing credit card accounts or opening new ones can affect your credit utilization ratio or credit history length.

Should You Consolidate Your Debt? 

Debt consolidation makes the most sense when it lowers your borrowing costs, simplifies repayment and fits into a realistic payoff plan.

If it won't reduce your interest costs — or you're likely to keep adding new debt — it may be worth exploring other options first, such as nonprofit credit counseling or, for unmanageable balances, a debt settlement program like Accredited Debt Relief. Just know that settlement reduces what you owe but can damage your credit.

Bottom Line

• Compare your current average APR with any consolidation offer.

• Calculate the total cost, including fees and interest.

• Choose a repayment method that keeps you from adding new debt.

• Consider nonprofit credit counseling if consolidation won’t lower your cost.

FAQs

Is debt consolidation the right choice for everyone?

Debt consolidation suits some borrowers, but it's not the right solution for everyone. It depends on factors such as your financial situation, goals and personal preferences.

What are the risks of debt consolidation?

Debt consolidation risks include the temptation to accumulate new debt, the potential for an extended repayment period that increases overall costs and the possibility of paying more in total interest. You can lower these risks by planning well and avoiding higher rates and additional fees on the new loans.

Can I consolidate all types of debt?

Debt consolidation options typically include credit card balances, personal loans, medical bills and other unsecured debts. However, certain types of debt, such as mortgage loans or federal student loans, may have specific consolidation programs or restrictions. You can check the eligibility criteria with new or existing lenders. 

Should I close my credit cards after consolidating debt?

Not necessarily. Keeping older credit card accounts open can help maintain your available credit and length of credit history, both of which influence your credit score. If you're worried about overspending, you can leave the accounts open but avoid new purchases or remove the cards from your wallet.

How do I compare the total cost across debt consolidation options?

To compare your total costs, it’s important to look beyond the monthly payment and review the APR, fees, repayment term and total amount you'll repay before choosing a consolidation option.

Can I consolidate medical debt?

In many cases, medical bills can be consolidated with a personal loan, debt consolidation loan or DMP, depending on the lender or credit counseling agency.

Key Terms

• Debt consolidation: Combining multiple debts into a single loan or payment, ideally at a lower interest rate, to simplify repayment and reduce total interest.

• APR: The yearly cost of borrowing, including interest and certain fees, shown as a percentage so you can compare the true cost of loan offers.

• Balance transfer: Moving existing credit card debt to a new card, often with a 0% intro rate, to cut interest during the promotional period. A 3% to 5% transfer fee usually applies.

• Credit utilization ratio: The share of your available revolving credit you're using. Keeping it below 30% generally helps your score.

• DMP: A structured repayment plan set up through a nonprofit credit counselor, who takes one monthly payment and distributes it to creditors, sometimes at negotiated lower rates.

• Origination fee: A one-time upfront charge, often 1% to 10% of the loan, that a lender deducts from your funds before disbursing the loan.

• Home equity loan: A loan against your home's equity that can carry a lower rate than unsecured debt but puts your home at risk if you default.

Summary generated by AI, verified by MoneyLion editors

Sources

• Consumer Financial Protection Bureau. 2023. "What Do I Need To Know About Consolidating My Credit Card Debt?"

• Consumer Financial Protection Bureau. 2024. "What Is the Difference Between Credit Counseling and Debt Settlement, Debt Consolidation, or Credit Repair?"

• Federal Trade Commission. "How To Get Out of Debt."

• myFICO. "What Is a Credit Score?"

• myFICO. "Does Checking Your Credit Score Lower it?"

• myFICO. "The Timing of Hard Credit Inquiries: When and Why They Matter."

• VantageScore. 2025. "The Complete Guide to Your VantageScore 4.0 Credit Score."

Jeannine Mancini contributed to the reporting for this article.