Updated: Mar 18, 2024

How to Consolidate Debt With a Personal Loan

Learn how personal loans can help you consolidate and eliminate debt so that you'll have fewer payments and pay less in interest over time.
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Imagine making just one payment towards your debt instead of several. And, you're saving money on interest while you do it. That's what you can expect with debt consolidation through personal loans.

Taking out a personal loan to consolidate your debt will combine all your debts -- from loans to credit cards -- into one separate, streamlined bill.

But you might stop and ask yourself: If I’m in debt, wouldn’t that mean taking on more debt and worsening the problem?

Here’s the thing: Though a debt consolidation personal loan is debt, it’s specially designed to alleviate your existing debt and get you back on the financial track.

Is a personal loan to consolidate debt right for you? Let’s find out.

Consolidate to Dispose of Debt Faster

Debt consolidation is the process of taking all your existing debts and consolidating them into one brand new loan.

Instead of having several different payments to keep track of, a debt consolidation gives you just one.

You’ll still need to pay off the new loan, but because it should have a lower interest rate, new terms and conditions, and a revised repayment structure.

Your debt becomes easier and more affordable to pay off when you’ve brought them together into one place.

How Debt Consolidation Works

When you take out a debt consolidation loan, you’re using one loan to pay off others. Before taking out a loan, your debt might look something like this:

  • Credit Card #1: $10,000 with a 20% APR
  • Credit Card #2: $7,500 with a 22% APR
  • Credit Card #3: $2,500 at 16% APR
  • Personal loan: $1,000 at 18% APR

Yes, you can even be in debt because of an existing personal loan, and you can take out another to help consolidate it. Your new personal loan will combine all of that debt together with a new interest rate:

  • Personal loan: $21,000 with a 14% APR

Once you open your new loan, your old loans and credit accounts you’re consolidating are officially closed out, with the balances imported to your new loan, under a new lender.

Your new lender is essentially paying off your prior lenders. Now, you’ve got the sum total of your debts in one place.

Where to Find Personal Loans

Personal loans are available from a large variety of lenders. Banks, credit unions, online lenders, and even peer-to-peer lending platforms are places where you'll find personal loans.

You'll want to consider the fees, interest rates, introductory promotions, borrowing periods, and prepayment rules of each personal loan before applying:

Consolidating Debt When You Have Bad Credit

If you have bad credit, it can be difficult to get approved for most loans or lines of credit. A poor credit score may get a prospective borrower’s application declined or saddled with a high interest rate.

Bad credit leaves a bad impression

It can prove frustrating to find a debt consolidation loan for bad credit when debt is the reason you have bad credit in the first place.

On one hand, when you go to apply for a debt consolidation loan, a credit check is still required. You could still be rejected even when a lender learns from your application that you intend to use the money to pay off debt.

Unscrupulous lenders exist

On the other hand, many lenders who may approve borrowers without any credit background research may not be the most reputable or offer unreasonable, unaffordable terms -- some may even charge you triple-digit interest!

With personal loans, a bad credit score in the upper 500s to low 600s may qualify some borrowers for a loan with an extremely high interest rate. However, those with poor or no credit are much less likely to be approved.

Look for alternative lenders

Despite all this, you can find success consolidating debt with bad credit, and find the right loan that fits the bill.

Some online lenders or member-based, nonprofit credit unions may be willing to work with customers who have poor credit and grant you a personal loan, since their approval and underwriting processes are often less rigid than those of conventional lenders.

You might also try a secured, versus unsecured, personal loan that requires borrowers to produce collateral -- like an asset or something of value -- as backing for the loan, and to leverage for a lower APR.

In the end, once you start paying off the loan, two things happen: you eliminate your debt and begin to raise your credit.

Why Personal Loans Are Helpful

Debt consolidation can take on many forms. There are loans to consolidate student debt, for example, or balance transfer credit cards to import debt from one card to another card with a better interest rate.

Home equity loans are another way for consumers to take out one loan to pay off other loans.

Personal loans are very multifunctional because they can be used to finance anything from a big purchase to emergency expenses. They may also be your best option to consolidate debt. Consider some of the benefits:

Lower, fixed interest rates

A debt consolidation loan’s APR will usually have an interest rate lower -- or at least equal to -- the lowest APR on your previous debts. It’ll also come with a fixed interest rate that’s locked in for the life of the loan, a big benefit if you’re dealing with the variable, fluctuating rates of credit card debt.

More affordable payments

Part of the reason people stay stuck in debt isn’t only because high interest rates raise their payment amounts, but the penalty interest and fees incurred when you can’t afford to make those payments.

Thus, many consumers in debt may go delinquent on their loans or only make the minimum required payment (say, on a credit card), barely making a dent in their debt.

Shorter repayment structure

Mortgage loans can range from 15 to 30 years, and credit cards can take decades to pay off when interest has built up too high.

A consolidation loan all but alleviates this problem by combining low APRs with shorter terms (usually one to five years), and lessening the chance of incurring additional debt.

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It makes paying down debt easier

A common debt scenario is juggling two or three debts at once -- it doesn’t sound like much, but try keeping track with each one, their due dates, how much you owe, how much you’re behind, and how much interest you may get penalized with (again) this month.

Consolidation combines several smaller debts into one large one, making debt easier to manage.

Approval is quick

Personal loans have a fast approval turnaround process, so if you qualify, you may be able to get your loan as soon as the same day you apply. Faster loans mean less delays in paying down debt.

Improve Your Chances of Approval

Getting approved for a personal loan with bad credit can be difficult, but it’s not impossible. Consider some of these tips:

Get a co-signer

If you don’t qualify for a personal loan on your own merit, see if the lender allows you to add a co-signer.

A family member or friend with excellent credit may be willing to endorse their names on the loan contract and get you approved on the strength of their credit. Several online lenders allow co-signers on their personal loans.

Find ways to build your credit

If you rent your apartment or house, your monthly payments don’t usually count towards your credit score, but you can have your rent reported to the major credit bureaus through sites such as Rental Kharma or RentTrack. It’ll reflect positively on your credit report even if you’re in debt.

Get a personal loan

How does getting a personal loan improve your chances of getting one? If you can only manage to obtain a loan with slightly higher interest, simply having the loan and paying it off begins to build your credit score.

The loan makes it easier to make payments on time, in full, activity that gives your credit a boost.


Personal loans can help you save money and pave the path to a debt-free life. If you’re wondering if debt consolidation is the right choice for you, consider this: To consolidate debt is to eliminate debt.

Under debt-free circumstances, you’d be able to pay all your credit accounts and loans without missing a beat. But when your debt has spiraled out of control, one of the keys to regaining that leverage is to consolidate your debt.

With a personal loan, you’re not only simplifying your payments, but you’re also narrowing your focus onto one single loan to emerge debt, build your credit, and make a fresh financial start.