If you’re struggling to manage your debt load or keep on track with several monthly payments across multiple accounts, debt consolidation may help you simplify. Debt consolidation is the process of combining—or consolidating—multiple debts into one monthly payment. Generally, you’ll do this by taking out a new loan and using the funds to pay off your current debts. But there are also some consolidation programs that don’t require qualifying for a new loan. 

There are pros and cons to consider, but if you’re looking for a way to better manage your finances, here’s how to consolidate debt (and what you should know before you do):

How Does Debt Consolidation Work?

Generally, people consolidate their debts by taking out a new loan or line of credit and using the funds to pay off their current debts. It’s similar to refinancing, but you’re paying off multiple loans—essentially combining them into one, new account. 

Because you’ll have fewer bills to pay, it can be easier to track and manage your money, which may be reason enough to look into this debt management tactic. However, depending on your new loan’s terms, debt consolidation can also decrease your monthly payments and lower your interest rate, which can free up room in your budget and save you money. 

Debt Consolidation Loans and Methods

There are different ways to go about consolidating your debts, and your best option may depend on your current debts, assets, and credit. Some popular options include:

Personal Loans

 Personal loans are installment loans with fixed interest rates and two- to six-year terms. You can use a personal loan for anything, including debt consolidation. The predictability can make managing your budget easier. If you have good to excellent credit you may also qualify for a lower rate than you get on your credit cards, saving you money on interest in the long run. 

Some lenders charge origination fees on the loans, but many borrowers save money by consolidating high-rate credit card balances with a low-rate personal loan. 

Balance Transfer Credit Cards 

Balance transfer credit cards typically offer new cardholders a promotional 0% annual percentage rate (APR) for around nine to 21 months, depending on the card and offer. You can transfer credit card balances to the new card, and some credit card providers let you transfer money into a bank account or use a balance transfer check to pay off different types of debt. 

Balance transfer credit cards can carry a 3% to 5% balance transfer fee, but you may save money in the long run if you transfer a high-rate credit card balance and pay it off during the promotional period. 

Home Equity Loans and Lines of Credit 

If you’ve built equity in a home, you could use your home as collateral to take out a loan or open a line of credit to fund your debt consolidation. It can be easier to qualify for a secured loan or line of credit than an unsecured personal loan, and you may receive a lower interest rate. But you’re also putting your home at risk if you can’t repay the loan and you may need to pay for an appraisal and closing costs or fees. 

A Debt Management Plan 

A debt management plan (DMP) can help borrowers consolidate and pay off credit cards. A DMP isn’t a loan, but a program that’s administered by a credit counseling agency. These can be particularly helpful if you’re struggling to make payments as the credit counselor may be able to negotiate lower monthly payments, interest rate deductions, and fee waivers. You also don’t need good credit to qualify. 

However, you may need to close the cards that are in the DMP, agree not to use any credit cards until you complete the plan, and pay a nominal startup and monthly fee. You’ll also need to be wary of scams. Some credit counseling agencies can charge large fees or make impossible promises like wiping out all your debt. Look for a certified nonprofit credit counselor to make sure you’re working with an affordable pro. 

Direct Consolidation Loan 

A federal Direct Consolidation Loan is for consolidating qualified federal student loans. As with a DMP, your credit won’t impact your ability to use a Direct Consolidation Loan. Consolidating federal student loans can help lower your monthly payments and make you eligible for forgiveness programs, but it won’t save you money on interest. Also, consolidating loans may cause you to lose certain benefits like loan cancellation or loan rebates. 

What Are the Benefits and Drawbacks to Debt Consolidation?

In spite of all the potential benefits, debt consolidation isn’t right for everyone. Once you learn how to consolidate debt, consider the pros and cons. 


  • Fewer bills to track each month.
  • May lower your monthly payment. 
  • Could save you money on interest. 
  • May improve your credit if you consolidate credit card debt with an installment loan. 


  • May be difficult to qualify for a loan with favorable terms.
  • You may have to pay origination or transfer fees.
  • Could lead to taking on more debt if you payoff credit cards and then continue using them. 
  • Can end discounts or special arrangements you had with the original creditors. 

Who Should Consider Debt Consolidation?

Debt consolidation may be most beneficial for those who have excellent credit and can qualify for a low-rate loan. Particularly if you had worse credit when you first borrowed money, market rates have fallen, or you have credit card debt, consolidating your debts can lead to significant savings. 

For those with poor credit, debt consolidation may still be an option. Even if you don’t wind up saving much (or any) money, consolidating loans can make it easier to manage your monthly bills and lower your monthly payments. 

In either case, in addition to understanding how to consolidate debts, you’ll want to examine the underlying reason you have debt. If it’s due to overspending, you might wind up back in debt—or even deeper in debt—if you consolidate without changing your habits. If there was a specific circumstance that required extra financing, debt consolidation can be a helpful tool on your path to debt freedom.