How Do Debt Consolidation Loans Work?

Key Takeaways
  • Debt consolidation loans conglomerate multiple debts into a single loan.
  • Personal debt consolidation loans typically feature a fixed rate, term, and payment.
  • A consolidation loan can save money and speed up account pay-offs in many cases.

Are you consistently making monthly payments on a mountain of debt, only to realize the balances aren’t going down significantly?Are you frustrated that your debt levels seem to remain the same, even though you are cutting spending or earning extra money on the side?

Even if you are not struggling to make the minimum payments on your credit card accounts, high-interest debt can linger for decades without a debt pay-off plan. If you are in a place where debt balances are not declining even though you have spending under control, a personal debt consolidation loan could be the answer.

What is a Debt Consolidation Loan?

A personal debt consolidation loan transfers multiple high-interest accounts into a single loan, making it easier to eliminate debt. The process can simplify repayment, lock in your rate, and provide a set pay-off date.

What Are the Features of a Debt Consolidation Loan?

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Loan type: Various loans can provide the funds needed to consolidate debts. The most common include personal loans, credit card balance transfers, and home equity loans or lines of credit.

When using home equity as collateral, you convert unsecured accounts into secured debt. The benefits include a lower interest rate and longer-term. Lenders often offer rates in the single digits and terms as long as 30 years. Extending pay-offs for three decades not only keeps you in debt longer but results in paying significantly more in interest. Collateralizing unsecured debt also puts your property at risk, should you struggle to remain current on the loan.

Credit card balance transfers roll the balance on one or more accounts to a new card. The incentive is a low or zero introductory rate and is best for smaller balances you can repay within the promotional period.

Personal loans do not generally require collateral and can save money by locking in the rate and paying off debt over a shorter timeframe. In some cases, you might reduce the interest rate, saving you even more.


Loan terms: The lender’s offer is based on your financial health, which can be challenging if you have high existing debt levels. The loan type will also impact the interest, term length, and amount offered.

Personal consolidation loans typically range from $1,000 to $100,000 for terms of one to seven years.

Interest-rate: Rates range from 5 to 35% based on verifiable income, debt-to-income, credit quality, and use of collateral. Stronger applications receive the best terms and lowest fees. 

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How Do Debt Consolidation Loans Work?

Most personal debt consolidation loans offer a fixed interest rate and term for the life of the loan. The interest rate and payment stay the same, making it easier to pay off the debt due to the predictable monthly bill. The new amount may be higher than the current minimum payments because you eliminate debt faster, likely saving thousands of dollars in interest.

To qualify for a personal loan, lenders verify employment and income along with a credit check. Underwriters also compare income with current debt payments to determine eligibility, interest, term, loan amount, and fees charged.

Online companies feature algorithms that compare rates across multiple lenders allowing you to shop for the best deal in one place without impacting your credit. You can also apply and submit verifications remotely for faster funding.

  • Will a debt consolidation loan help me pay off debt?

    Debt consolidation loans do not pay off debt. Instead, it transfers balances from high-interest rate credit cards to a fixed rate and term loan. Paying off the loan will often expedite debt elimination.

  • How do I get a debt consolidation loan?

    You must qualify for a new loan through a lender offering personal debt consolidation loans. Online lenders have fast and easy processes that can close a loan in a few days after receiving all required documentation.

  • How do debt consolidation loans work?

    A debt consolidation loan transfers balances from multiple accounts into a single loan. You can save money with a shorter loan term and, in some cases, a lower interest rate.