Debt Consolidation Loans: When They Help and When They Don't

A debt consolidation loan is a personal loan used to pay off several other debts, usually credit cards. Instead of juggling multiple balances and due dates, you make one fixed monthly payment for a set number of years.

Potential benefits

• Lower interest rate if your credit qualifies for a rate below your cards’ rates.
• A clear end date, typically two to five years.
• One payment to keep track of.
• Possible credit score boost as your card utilization drops.

Potential downsides

• Origination fees that some lenders charge, often deducted from the loan amount.
• Longer terms can mean lower payments but more total interest.
• Freed-up credit cards can tempt you to rack up new debt.
• Rates depend heavily on your credit. With fair or poor credit, the rate may not beat your cards.

How to compare offers

1. Prequalify with several lenders. Many use a soft credit check that doesn’t affect your score.
2. Compare the APR, which includes fees, not just the interest rate.
3. Look at total cost: monthly payment times number of months, plus any fees.
4. Check for prepayment penalties.

Banks, credit unions and online lenders all offer personal loans. Credit unions sometimes offer lower rates to members.

Alternatives

• Balance transfer card: 0% interest for a limited time if you have good credit. Learn more.
• Debt management plan: A nonprofit credit counseling agency negotiates lower rates and you make one monthly payment to the agency.
• Avalanche or snowball: Paying aggressively on your own, with no new loan. See our debt payoff plan.

Avoid risky options

Be cautious about using a home equity loan to pay off cards. It turns unsecured debt into debt secured by your house. Also avoid payday loans and high-fee “debt relief” companies that ask for upfront fees.