Personal loan for debt consolidation

By Rebecca Lake

Reviewed by James Heflin

Sep 30, 2023

Read time: 7 min

Adult woman embracing mother from behind

Key takeaways:

  • Debt consolidation could streamline your monthly payments, lower the cost of your debt, or both.

  • Paying off credit card balances with a personal loan could have a positive impact on your credit standing.

  • Not every debt is a good candidate for consolidation.

Debt happens, but you don't have to live with it forever. Taking control of your debts and choosing the best plan for paying them off is a way to manage your own financial success, now and in the future.

Debt consolidation is a strategy for lowering the cost of your debt and getting rid of it on a timeline that works for you. If you consolidate debts with a personal loan, you take one loan to pay off multiple smaller debts. Let's take a look at how it works.

How does a personal loan for debt consolidation work?

A personal loan for debt consolidation lets you borrow a lump sum to pay off several debts at once. For example, you might use a lower-interest loan to pay off high-interest credit cards. You then pay back the loan according to that lender's terms. Personal loans for debt consolidation are usually unsecured, meaning you qualify based on your credit standing and financial situation.

Types of debt you can consolidate

You can use a personal loan to consolidate different types of debt, but usually, you're talking about debts such as:

  • Credit cards

  • Retail store cards

  • Gas credit cards

  • Loans (other than vehicle loans or mortgages)

  • Medical bills

You could also use a personal loan to consolidate other personal loans you already owe. Whether it makes sense to do that can depend on the new loan's terms and how quickly you can pay it off. 

You can't use a personal loan to consolidate student loans. Student loans have special consolidation options.

What is the point of consolidating debts? 

One main goal of consolidating debts is to simplify your finances. For example, say you've got six credit card balances you're paying off. That means six payments every month. 

That's a lot to keep up with on top of your regular monthly bills. The more pieces there are in your financial puzzle, the easier it is to drop one. That's to say, juggling multiple bills could make it more likely for a payment to slip through the cracks. 

Debt consolidation can reduce the number of monthly payments you have to make. For example, if you get a personal loan to consolidate all six of your credit cards, you have just one debt payment to make. 

A lower interest rate could lead to the third reason to consolidate debts, which is to lower your total monthly payment. For instance, you might go from making $500 in minimum credit card payments down to making one $300 loan payment. Lowering the payment amount can provide badly needed relief for your budget. But it could mean it'll take longer to pay off the debt. The longer your repayment period, the more interest you'll pay overall. So it's possible to get a lower interest rate but not save money on the debt.

You might get all three of these benefits, or you might get one or two. 

Potential drawbacks of using a personal loan to consolidate debt

Using a personal loan for debt consolidation isn't always a great solution. For one thing, it can be hard to qualify for a loan at favorable terms if you have a lower credit score. If you can only get a loan with a higher annual percentage rate (APR), you might be better off choosing another option for paying down debt. 

Also, most debt consolidation loans have fees. You should compare your options and find out what they cost. A personal loan may or may not have the lowest price tag. For instance, if you're a homeowner with enough equity, you might qualify for a home equity loan that checks all the boxes and costs less overall. 

And there's a risk built into all debt consolidation options—if you run up new balances on your credit cards after paying them off with a loan, you could end up even deeper in debt. 

Last, some debts shouldn't be paid off with a loan. Namely, if you have a debt with the option to get on an interest-free payment plan, you might not want to pay that off with a loan that charges fees and interest. Some medical debts can be paid off via a private agreement at little to no additional cost.

How to choose the right debt consolidation loan

Here are some of the most important factors to weigh when shopping for debt consolidation loans.

  • Interest rate and APR. A lower APR is better because it means you'll pay less for the loan. 

  • Fees. Lenders typically charge a fee for making the loan. Also ask about other fees, too, such as a prepayment penalty. That's a fee some lenders charge if you want to pay off your loan ahead of schedule. 

  • Loan limits. Lenders set loan minimums and maximums. 

  • Terms. A longer repayment term can mean a lower monthly payment, but it can also mean paying more in interest over time.

  • Benefits/features. Some lenders offer benefits like a rate discount for setting up automatic payments, or financial management tools. Those are nice things to have, so they may make one loan option more appealing than another. For example, Achieve personal loans offer rate discounts if you let us use your loan funds to pay your creditors directly, if you have sufficient retirement savings, or if you apply with a co-borrower. 

Getting rate quotes for personal loans can give you an idea of what you might qualify for. Look for lenders that offer rate quotes with a soft credit check that won't affect your credit. 

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How will a personal loan affect my credit? 

Personal loans can impact your credit in two ways—the credit check (potential small negative effect) and your credit utilization ratio (potential significant positive impact).

Applying for a loan almost always results in a hard credit pull. Hard pulls can knock a few points off your score. The effect is small and temporary. Your score can recover in a matter of months.

Consolidating credit card debts with a personal loan can improve your credit standing by lowering your credit utilization. Utilization is your credit card balance compared to your credit limit. (It's calculated for each card and overall.) The lower this number, the better for your credit profile. Personal loan balances don't affect your score the same way credit card balances do. If you pay off your cards with a loan and keep your credit card balances at $0, your score could improve. 

How do you qualify for a debt consolidation loan?

Lenders look at your credit score and income to decide whether to approve you for debt consolidation. Every lender is different when it comes to the minimum credit score and income you need to qualify. Talk to an Achieve loan consultant to learn more. 

A better credit standing tends to make it easier to get approved. But it is possible to get personal loans for debt consolidation with bad credit.  

Homeowners, get help with your high-interest debt

Use the equity in your home to consolidate debt, lower your monthly payments, and reduce your stress.

Other ways to get rid of debt

Not sure if a personal loan for debt consolidation is right for you? Here are a few other ways to manage debt. 

  • Home equity loan. If you own a home and have enough equity, you could borrow against your equity to consolidate debt. Home equity is the difference between what you owe on your home and what it's currently worth. You might want to check home equity loan rates to see what you could borrow.

  • Debt resolution. Resolving debt means negotiating with creditors to pay less than what's owed. It might be a good option if you're behind on bills and can't afford to repay your debts without some degree of forgiveness. Sometimes creditors are willing to forgive part of your credit card debt. You can negotiate with creditors yourself or work with a professional debt resolution company.

  • Debt management plan. A debt management plan is a structured plan for paying off debt. A credit counselor can help you set one up. It won't erase what you owe, but your creditors might waive fees or temporarily lower your rate to help you manage your payments. You will need to agree to stop using credit cards while you're in the plan.

  • Bankruptcy. Chapter 7 bankruptcy can erase unsecured debt, while Chapter 13 bankruptcy gives you time to pay it off in full. Many people earn too much to qualify for Chapter 7. And many people in Chapter 13 don't save any money at all. You'd want to talk to a bankruptcy lawyer to find out if one is appropriate for your situation.

Leave debt behind, so you can move forward

Get rid of your debt and free up your cash flow without a loan or great credit.

What's next?

  • Gather your info. Make a list of your unsecured debts and how much they cost you. Note whether they are current or behind.

  • Prequalify for a loan. Check with one or more lenders who do a soft credit check to find out if you qualify for a loan, and if so, for how much, and at what cost.

  • Ask for guidance. If you're still not sure how to approach your debt, there's one more thing you can do. Talk to a debt expert who can help you decide which path might be right for you.

Rebecca Lake - Author

Rebecca is a senior contributing writer and debt expert. She's a Certified Educator in Personal Finance and a banking expert for Forbes Advisor. In addition to writing for online publications, Rebecca owns a personal finance website dedicated to teaching women how to take control of their money.

James Heflin - Author

James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.

Frequently asked questions

The minimum credit score to get a personal loan for debt consolidation depends on the lender. Achieve personal loans, for example, require a score of at least 620. If you have lower credit, consider applying for a personal loan with a cosigner, or pursuing another option. 

If you have a good credit score and steady income, it might be fairly easy to get a personal loan to consolidate debt. Lower credit, on the other hand, limits your options. You could pursue a secured loan, such as a home equity loan if you’re a homeowner with equity.

There is no minimum amount of debt required to consolidate. But some lenders have minimum loan amounts. At Achieve, personal loans start at $5,000 and home equity loans start at $15,000. If you need less than that, you could research other lenders, or you could combine debt consolidation with another financial goal.

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