Debt Consolidation 101: What It Is, How It Works and Where to Find Loans

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Updated on Friday, March 27, 2020

Juggling debts with different payment due dates, amounts and interest rates can be a headache. It can get even worse when you’re tight on money and don’t know when you’ll be debt-free.

Debt consolidation is one way to simplify your finances. By merging multiple credit card bills and loans into one monthly payment with more favorable terms, debt consolidation can help get you out of the red faster and/or make your monthly payments more manageable.

Here’s a look at how debt consolidation works, how it may affect your credit and different ways you may consolidate your debt.

How does debt consolidation work?

Debt consolidation involves taking out a new loan (often a debt consolidation loan) and using it to pay off other unsecured consumer debts, such as credit card bills. The new loan should have more favorable terms, such as a lower APR, to make repaying your debt more affordable or simply easier.

There are several products you may choose from to consolidate your debt:

How debt consolidation may help improve your credit score

  • It can help you pay down your debt sooner. A consolidation loan with a fixed term or an expiration date on a promotional period can be a powerful motivator to repaying your old debts sooner. Less debt can increase your credit score, making you more liable to qualify for better loan products later. The amount you owe on your accounts compared to your income determines 30% of your FICO® Score, a type of credit score commonly used by lenders.
  • Thanks to flexible terms, you can build a history of regular, on-time payments. If you’ve struggled with making payments in the past, you could choose a longer repayment term for lower, more manageable monthly payments in the future. Positive payment history is the most significant factor in calculating your FICO Score, at a whopping 35%. Showing a history of payments that are on-time and in full makes you come across as a more reliable borrower.
  • May lower your credit utilization ratio, if you use a loan to do so. The more revolving debt you pay off, the less you’re using from the total amount of revolving credit available to you, which helps lower your credit utilization ratio. This ratio determines 30% of your credit score. Ideally, you should keep your ratio at under 30%.

Where to find debt consolidation loans

You can apply for a debt consolidation loan through a variety of lenders, including banks, credit unions and online lenders. You may explore lenders using our debt consolidation marketplace.

To help you kickstart your search, you can review the below three lenders.

Debt consolidation loan lenders


Learn more

Best Egg

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Learn more


5.99% to 25.05%

5.99% to 29.99%

7.98% to 35.99%


36 or 60 months

36 or 60 months

36 & 60 months

Borrowing limits

$4,000 to $25,000

$2,000 to $35,000

$1,000 to $50,000

Origination fee

1.00% - 5.00%

0.99% - 6.99%

Up to 8.00%

Minimum credit score requirement




Are there debt consolidation loans for bad credit?

While you can get a debt consolidation loan for bad credit (below 670), as long as you have enough money for the minimum monthly payments, it may not be worth your while. The worse your credit, the higher your interest rate can be and the more you will have to pay, including origination and other fees, to consolidate your debt.

Keep this in mind as you shop for lenders willing to consider factors beyond your credit score such as your job history or education. Some of your best bets could be online lenders who could offer more flexible terms, or credit unions whose interest rates are capped at 18%. Tapping into your home equity or getting a secured loan (see above) are some other options, but keep in mind the risk of losing your assets if you default on your payments.

Is debt consolidation a good idea? How to decide for yourself

Depending on your individual circumstances, such as your monthly income, type of debts, credit score, and willingness to change your spending habits, debt consolidation may or may not be a good idea.

When debt consolidation is a good option …

  • The reasons behind the financial decisions that led you into debt are clear and you’re committed to ensuring it won’t happen again.
  • You’ve met with a credit counselor or financial advisor to put together a realistic budget (or are confident in your ability to do so on your own)
  • All your other options to get out of debt have been researched and explored
  • Committing to the monthly payments and terms of the consolidation loan are achievable
  • You’re saving money compared to what you were paying previously on all your debts

When debt consolidation might not be the right option …

  • Decreasing your expenses might not be possible and you might rack up balances on old credit lines
  • You’d need a secured loan for good interest rates but you’re risk-averse or worry you won’t be able to keep up with payments
  • Savings are negligible or nonexistent after paying the interest rate and associated fees of a debt consolidation loan