Debt consolidation loans work by rolling multiple debts into one new loan, simplifying repayment with a single fixed monthly payment. Instead of juggling different credit card balances, medical bills, or personal loans, you take out a lump sum loan to pay off all your debts at once—leaving you with just one payment to manage.
This type of loan is a great option if you qualify for a lower interest rate than the rates on your existing debts. A lower interest rate means you’ll save money over time, and since debt consolidation loans have fixed rates and set repayment terms, you’ll know exactly when you’ll be debt-free—which can be a major motivation boost.
How a Consolidation Loan Can Simplify Your Finances
Let’s say you owe $15,000 across three credit cards, with an average interest rate of 23%, and you’re currently making minimum payments. At this rate, it could take you six years to pay off your balances, and you’d pay nearly $13,875 in interest.
Now, imagine you qualify for a $15,000 debt consolidation loan at a 13% interest rate with a five-year repayment term. Not only would you get out of debt a year earlier, but you’d also save around $8,400 in interest—plus, you’d only have one predictable payment to manage.
Want to see the numbers for yourself? Use a debt consolidation calculator to compare your options and determine if this strategy will save you money.
Where Can You Find Debt Consolidation Loans?
Debt consolidation loans are available from a variety of financial institutions, including banks, credit unions, and online lenders. Each option has its own benefits, eligibility requirements, and loan terms, so it is important to compare them carefully before applying.
Banks
Traditional banks are a common choice for debt consolidation loans, especially for borrowers with good or excellent credit (typically a credit score of 690 or higher). Banks often provide lower interest rates compared to other lenders, making them a cost-effective option for qualified applicants.
Advantages of borrowing from a bank:
- Lower interest rates than many other lenders
- Fixed repayment terms with structured monthly payments
- Personalized service, especially if you have an existing relationship with the bank
Potential drawbacks:
- Stricter eligibility requirements, making it difficult for those with lower credit scores to qualify
- Slower application and approval process compared to online lenders
- May require a higher income or strong credit history to secure the best rates
Best for: Borrowers with strong credit who prefer working with a reputable financial institution and want access to in-person banking services.
Credit Unions
Credit unions often offer lower interest rates than traditional banks, making them an attractive option for those looking to consolidate debt. They also tend to be more flexible with approval requirements, meaning borrowers with fair or even poor credit may have a better chance of qualifying.
Advantages of borrowing from a credit union:
- Competitive interest rates, often lower than banks
- More lenient approval criteria for those with lower credit scores
- Member-focused service, which can lead to better repayment terms
Potential drawbacks:
- You must be a credit union member before applying for a loan, though membership is typically easy and affordable
- Fewer branch locations compared to major banks
- Application and funding processes may take longer than online lenders
Best for: Borrowers looking for lower interest rates and flexible approval terms, especially those with credit scores below 690 who may struggle to qualify with traditional banks.
Online Lenders
Online lenders provide fast and convenient debt consolidation loans with options for borrowers across the credit spectrum, including those with bad credit. Many online lenders allow you to pre-qualify without impacting your credit score, making it easier to compare offers before committing.
Advantages of borrowing from an online lender:
- Faster approval and funding times, with some lenders offering same-day or next-day funding
- Available to borrowers with a wide range of credit scores
- Many lenders offer pre-qualification, allowing you to see potential loan terms without a hard credit inquiry
Potential drawbacks:
- Interest rates can be higher, especially for those with poor credit
- Some online lenders charge origination fees that add to the cost of borrowing
- Customer service may be limited to online support, rather than in-person assistance
Best for: Borrowers who need quick approval or have lower credit scores but still want the ability to compare multiple lenders to find the best rate.
How Do You Qualify for a Debt Consolidation Loan?
Your ability to qualify for a debt consolidation loan depends on three key factors:
Credit Score
Lenders usually require a credit score of at least 630, though borrowers with a 690+ score qualify for the best interest rates.
Pro Tip: You can still get a debt consolidation loan with bad credit—some lenders specialize in loans for lower credit scores. Improving your score before applying (such as paying off small balances or fixing credit report errors) can boost your approval odds.
Debt-to-Income Ratio (DTI)
Your DTI ratio is the percentage of your monthly income that goes toward debt payments. Most lenders prefer a DTI below 50%.
Example: If your monthly debt payments total $1,500 and your monthly income is $4,000, your DTI is 37.5%, which is a good range for loan approval.
Income & Employment History
Lenders want to see stable income—whether through a full-time job, self-employment, or another reliable source. Be ready to provide:
✔️ Pay stubs or tax returns
✔️ Bank statements (to verify income deposits)
✔️ Employment history (some lenders require 2+ years of consistent income)
Pro Tip: If you have a low credit score or high DTI, applying with a co-signer may increase your approval chances and help you secure a better interest rate.
How Does a Debt Consolidation Loan Affect Your Credit Score?
A debt consolidation loan can help or hurt your credit, depending on how you manage it.
Ways It Can Improve Your Score:
- Lowers your credit utilization ratio, which accounts for 30% of your credit score.
- Replaces multiple debts with one fixed payment, reducing the risk of missed payments.
- Demonstrates responsible borrowing behavior over time, helping build credit history.
Ways It Can Temporarily Lower Your Score:
- Applying for a loan results in a hard credit inquiry, which may cause a slight drop (typically 5–10 points).
- Closing old credit card accounts after consolidating can shorten your credit history, potentially impacting your score.
Pro Tip: Keep old credit card accounts open with a zero balance to maintain your credit history while still benefiting from consolidation.
Read More: What is a Better Way to Get a Loan?
When to Avoid a Debt Consolidation Loan
Debt consolidation loans aren’t the right fit for everyone. Consider alternatives if:
- You tend to accumulate new debt. If you consolidate credit cards but continue using them, you may end up in even more debt than before.
- You can’t qualify for a lower interest rate. If the new loan has a higher rate than your current debts, consolidation won’t save you money.
- Your debt is too high. If your total debt exceeds 50% of your income, debt settlement or another repayment strategy may be a better option.
Is a Debt Consolidation Loan Right for You?
A debt consolidation loan can be a smart financial move if:
- You qualify for a lower interest rate than your current debts.
- You prefer a fixed payment schedule with a set payoff date.
- You’re committed to not taking on new debt while paying off the loan.
However, if the new loan results in higher overall costs or longer repayment terms, exploring other debt repayment strategies may be a better choice.
Frequently Asked Questions
1. Will a debt consolidation loan lower my monthly payments?
Yes, in many cases, a debt consolidation loan can reduce your monthly payments by offering a lower interest rate or extending your repayment term. However, extending the loan term may result in paying more interest over time.
2. Can I get a debt consolidation loan with bad credit?
Yes, some lenders offer debt consolidation loans for borrowers with bad credit, but these may come with higher interest rates. Improving your credit score before applying or using a co-signer can help you secure better terms.
3. How long does it take to get approved for a debt consolidation loan?
Approval times vary by lender. Some online lenders provide same-day or next-day approvals, while traditional banks and credit unions may take a few days to a week to process an application.
4. Will a debt consolidation loan affect my credit score?
Yes, applying for a loan results in a hard credit inquiry, which may temporarily lower your score. However, consolidating debt can improve your score in the long run if you make on-time payments and reduce your overall credit utilization.
5. What types of debt can I consolidate with a debt consolidation loan?
Debt consolidation loans are typically used for unsecured debts, such as:
- Credit card balances
- Personal loans
- Medical bills
- Payday loans
Secured debts, like mortgages or auto loans, are usually not eligible for debt consolidation.
