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Last Updated: 10/28/2026
Written by Sarah Brady
Edited by Christine Cueto
Debt consolidation is a strategy for managing debt. To use this strategy, you start by taking out a new loan* or credit card that you use to pay off your older debt, or by setting up a payment plan that allows you to roll multiple debt payments into one monthly payment. When you consolidate the right way, you can make your finances more manageable.
According to Financial Educator and Consultant Jackie Cummings Koski, consolidating debt can be helpful, depending on your circumstances and goals:
You should always weigh this option within the context of everything that’s going on with your life. If you’re overwhelmed by having too many separate debts, high interest debts or high amounts of debt, and you want to lower the overall interest rate, that might be a good reason to consider consolidating. Also, if you don’t feel capable of managing separate debts and prefer to pay one big bill versus multiple bills.“
— A. Jackie Cummings Koski, CFP®, AFC®
Minimize the number of debt accounts you're managing
Reduce the interest rates on your debt
Reduce the minimum debt payments you have to make each month
If you have a creditor you don’t like doing business with, consolidating debt and paying off the account can also help you end the relationship with that creditor.
There are multiple products you can use to consolidate your debt, including balance transfer credit cards, personal loans, and home equity loans. For each of these products, you’ll need to qualify based on the creditor’s requirements for your credit history, income, and other factors.
You can also consolidate debt by enrolling in a debt management plan (DMP) through a nonprofit credit counseling agency. If you go this route for debt relief, qualification may likely depend on the kind of debt you have and how much you can afford to pay.
Whether you’re seeking to consolidate debt, pay off medical bills, or simply need a little extra cash to cover unexpected expenses, we’ve got you covered.
One of the best strategies for consolidating high-interest accounts like credit cards is to use a personal loan to pay them off. That’s because credit cards typically have much higher interest rates than personal loans.
For example, the average APR for a credit card in July of 2026 is almost 21%, while a personal loan has an average APR around 12%.
You’ll generally want to avoid consolidating debt that’s backed by collateral, like mortgages and car loans. That’s because these types of “secured” loans usually have relatively low interest rates. Additionally, mortgage lenders may offer hardship assistance to borrowers struggling with their mortgage debt.
| Credit Card | 22.21%1 |
|---|---|
| Personal Loan | 12.44%2 |
| Home Equity Loan | 7.91%3 |
| Home Equity Line of Credit | 7.36%4 |
| Mortgage | 7.03%5 |
| Auto Loan | 6.35%6 |
Debt consolidation isn’t usually beneficial for managing debt with a lot of payment flexibility either, like federal student loans and medical bills.
You want to think twice about consolidating student loans,” advises Cummings Koski.
“If you have federal student loans and consolidate them by moving them to a private student loan, you could be giving up some valuable benefits,” she says.
— A. Jackie Cummings Koski, CFP®, AFC®
Some federal student loans are eligible for income-driven repayment (IDR) plans, with payments as low as $0. If your federal student loan isn’t eligible for this type of repayment plan, you might consider consolidating through the Department of Education (more on this below), rather than through a private lender.
With medical bills, you can avoid the need for consolidation by applying for free or discounted charity care, negotiating the bill down to an amount you can afford, including the bill in a debt management plan (DMP), or setting up an interest-free monthly payment plan.
There are several ways to consolidate debt, but each one has its own benefits and requirements. Here’s a look at the most common options:
Personal loans are sometimes referred to as “debt consolidation loans,” since you can use them for debt consolidation. Whether or not you qualify depends on the lender's requirements for your credit and income. These loans can be a good option for credit card consolidation since they usually carry much lower interest rates than credit cards. However, rates generally aren't as low as secured debt, and you may have to pay an application fee or origination fee to the lender.
HELoans and HELOCs allow you to tap into your home equity to pay off old debt. But you'll have to use your home as collateral. According to Senior Assistant Director of Financial Wellness at University of Oregon, Dr. Gilbert Rogers, "Home equity loans usually offer a lower interest rate due to the asset backing the loan (your home)." He warns borrowers, however, that if their finances are unstable and they miss loan payments, they risk foreclosure. Other drawbacks to HELOCs include variable interest rates and loss of home equity.
Reverse mortgages, or home equity conversion mortgages (HECMs), are only available to homeowners 62 years of age or older. Similar to home equity loans, a reverse mortgage lets you cash out some of your home equity. But with these loans, the bank sends you a payment each month. Then, when you move or pass away, the home will likely have to be sold to pay off the debt. You may also have to pay origination fees and closing costs up front, and the longer you go without repaying what you borrowed, the more fees and interest charges you accrue.
If you have multiple student loans from the federal government, you might consider applying for a Direct Consolidation Loan through the Department of Education (ED). It can take about six weeks for applications to be processed. If you qualify, you can potentially reduce your monthly payment amount, get into a fixed interest rate, and gain access to an IDR plan or federal loan forgiveness program, all at no additional cost to you.
A balance transfer credit card can help you pay down debt faster, since it comes with an introductory 0% APR period — usually for six to 21 months. Just beware that if the card doesn’t have 0% purchase APR, you'll be charged interest on your purchases. You'll likely be charged a 3% to 5% balance transfer fee on the amount you consolidate as well, and the card may have an annual fee.
Taking out a 401(k) loan may seem the same as pulling money out of your savings, but it's far more expensive since it converts some of your retirement savings into debt. If you default on a 401(k) loan or leave your job before repaying it, the outstanding balance may be treated as a taxable distribution, subject to income tax and potentially a 10% early withdrawal penalty if you're under age 59.5. Plus, you'll lose out on some of the interest you can earn before retirement.
With a DMP, a credit counseling agency will set you up on a plan to pay off your credit cards and other unsecured debt, over the course of roughly three to five years. Unlike loans and credit cards, good credit isn't a requirement to go on a DMP. Once you're enrolled, some of your creditors may reduce your interest rates to 10% or less, and then you'll begin making one monthly payment that's distributed to your creditors. You'll also get financial counseling and education while on the plan. On the downside, you may be required to close most of your credit cards, and you may also have to pay initial fees or monthly fees for your DMP, but some people qualify for fee waivers based on their income.
Not everyone has a loved one with cash to spare. If you do, it could be worth asking them for a loan to help you consolidate debt. Unlike some other solutions, you won't have to qualify for the loan based on your credit scores, and you probably won't be asked to pay interest or any fees. To seal the deal, however, it helps to be direct about when and how you'll pay the money back. Just like a loan from a business, you may want to put the agreement in writing.
Like with most financing, creditors have different requirements to qualify for their debt consolidation products. But they tend to follow similar guidelines. Here’s what they’re typically looking for:
Credit scoresWhen it comes to getting approved for balance transfer credit cards and debt consolidation loans, your credit scores are crucial. "Be mindful of your credit scores because they're what most lenders use to set your interest rate," says Cummings Koski.
In general, the higher your scores are, the more likely you are to qualify for higher limits on credit cards, or for larger loan amounts, with lower APRs. You can also improve your chances of qualifying for a loan or credit card by applying with a cosigner.
However, you might be able to get approved for a loan through Prosper with credit scores of 600 or higher..
Employment historyCreditors will look at income and employment to determine what you can afford and how much credit you qualify for. You'll have a better chance of being approved for a loan (whether for debt consolidation or not) if you have a steady source of income that enables you to afford the loan payment.
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Debt and incomeLenders might look at your debt-to-income ratio (DTI) to determine the loan amount you qualify for. DTI is calculated by adding up all of your minimum monthly debt payments and dividing that figure by your gross (or pre-tax) monthly income. You can use this formula to calculate your DTI:
DTI = (Monthly debt payments / Income) x 100
For example, let's say your minimum monthly debt payments add up to $2,000 and your gross monthly income is $5,000. Your DTI would be calculated like this:
Step 1: DTI = ($2,000 / $5,000) x 100
Step 2: DTI = ($0.40) x 100
Step 3: DTI = 40%
Having a low DTI means you have a relatively low amount of debt in comparison to your income. The lower your DTI, the better your chances are of being approved for a loan. If you’re applying for a personal loan, most lenders want to see a DTI of 36% or less.
If your DTI is high, you may need to find a way to pay down some of your debt, or increase your income, before you can qualify for a consolidation loan.
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Home equityFor HELoans and HELOCs, your home equity will be a key factor in determining if you qualify. In other words, your home must be worth more than the balance you owe against it. You're more likely to qualify for one of these products if your home is worth at least 15% to 20% more than your mortgage balance when you apply.
Finding the best debt consolidation option can take some work, especially if you’re looking to bring down your monthly expenses.
A common mistake is thinking that consolidation will always lower your overall payments,” warns Cummings Koski. “Sometimes it can,” she says, “but not always.”
— A. Jackie Cummings Koski, CFP®, AFC®
Finding the best debt consolidation option can take some work, especially if you’re looking to bring down your monthly expenses.
“A common mistake is thinking that consolidation will always lower your overall payments,” warns Cummings Koski. “Sometimes it can, but not always,” she says.
To calculate the cost of debt consolidation and find out if it may reduce your costs, you’ll have to compare the following information for your new consolidation option to the debt you plan to pay off:
Try our loan calculator to estimate your monthly payment and APR before applying for a debt consolidation loan.
Don’t worry if calculating all of this seems overwhelming. It’s just basic math, and there are even free calculators you can use to come up with the numbers. Plus, if you carefully compare the numbers and select the appropriate product, consolidating debt could potentially save you thousands of dollars in interest charges and fees.
Here’s an example of how much it could cost to pay off debt, before and after consolidating:
| Balance | APR | Monthly Payment | Payoff timeline (months) | Total interest charges | |
|---|---|---|---|---|---|
| Credit card 1 | $10,000 | 22% | $200 | 137 | $17,356.12 |
| Credit card 2 | $5,000 | 24% | $120 | 91 | $5,858 |
| Cash advance loan | $1,000 | 25% | $100 | 12 | $133 |
| Total | $16,000 | - | $420 | 137 | $23,347 |
| Balance | APR | Monthly Payment | Payoff timeline (months) | Total interest charges | |
|---|---|---|---|---|---|
| Debt consolidation loan | $16,000 | 12.49% | $359 | 60 | $5,593 |
In this example, debt consolidation would allow a borrower to become debt free six years earlier (77 months), reduce their monthly expenses by $61 and save a whopping $17,754 on interest.
This example is hypothetical and for illustrative purposes only. Actual rates, terms, and savings will vary based on your creditworthiness, income, and the lender’s requirements.
If you’re ready to pursue debt consolidation, be sure to proceed with care. By taking these strategic steps to consolidate, you can avoid headaches and maximize your savings:
Before you start shopping around, get clear on what you're hoping to accomplish. "You should always take the time to outline goals for debt consolidation and ensure they're being achieved through the process (i.e., savings, simplification, etc.)," recommends Rogers..
Add up the total amount of debt you want to pay off, that way you'll know how much financing to look for.
Pull your free credit reports to see if there are any errors that need to be addressed. If you have a loan account with Prosper, you can view your FICO score for free. You might also have access to complimentary credit scores through your creditor(s) or through a free credit monitoring program.
Look at different types of creditors to see what they have available, and which types of debt you can pay off with their loans or credit cards. Be sure to include your bank or credit union in your search, since it may offer special incentives to customers. You can also easily broaden your search by using online marketplaces like Prosper to help you compare multiple loan options.
Getting prequalified for a loan or credit card can allow you to see a rate quote from a creditor without a hard credit pull. In other words, it won’t hurt your credit scores. Ideally, you'll want to compare three or more prequalification offers to get an idea of what's available and help you negotiate the best rates.
Once you've honed in on the best offer, submit your application. Be prepared to provide your contact information, proof of income and details about your debt.
Once you receive your new credit card or loan, you'll need to pay off your old debt accounts. You may have to pay them off yourself, or you can coordinate with the new creditor to send payments on your behalf.
Make a note of the due date and minimum payment required for your new account, so you can work them into your budget and stay current on the payments. You should also make sure you cover any payments that come due on your old debt while you're working through this process.
Consolidate high-interest debt, finance home upgrades or pay for healthcare in just a few steps with a personal loan through Prosper.
The benefits of debt consolidation aren’t always clear-cut, says Rogers. “Credit cards and loans are both available as debt consolidation tools, but they each come with pros and cons. For example, anytime there is an offer to consolidate debt through a loan or credit card, there will be a fee.”
Fortunately, if you choose to consolidate your debt carefully, you’re likely to experience more of these pros than cons:
Savings: Consolidating into a lower APR can save you money on interest and other finance charges.
Fewer accounts: When you use debt consolidation to pay off multiple accounts, you have fewer accounts to monitor and manage.
Improve your credit: Consolidating can help you pay off debt faster, potentially improving your credit scores.
Spread out payments: Consolidation can allow you to extend the length of your debt repayment, bringing down your total monthly payment amount and helping you balance your budget.
Financing fees: Depending on the product, you may have to pay an origination fee, a balance transfer fee, closing costs, an annual fee, or other costs associated with the new financing.
Credit requirements: Your eligibility for debt consolidation products may depend on your credit scores. Poor credit can be a roadblock.
Prepayment penalties: Some of your current creditors may have “prepayment penalties,” which are fees for paying off your debt early.
Payments could increase: If you consolidate credit card debt into a loan, your monthly debt payments could increase since, unlike credit cards, loans have a fixed repayment schedule.
Initial hit to your credit: Your credit scores may drop by a few points when you apply for a new loan or credit card, and they may drop even more if you open or close accounts due to debt consolidation.
It’s tempting to see debt consolidation as a final solution for financial problems. But keep in mind that consolidating debt won’t automatically make your debt go away. If you want to be debt free once-and-for-all, you may need a new approach to managing your finances.
“The biggest mistake individuals make when consolidating debt is sticking to bad habits. Any time you make a significant change in your financial situation you should sit down and reassess your habits,” Rogers suggests.
Here are some new habits to help you effectively manage your debt after you consolidate:
1 
Consolidation can change your monthly expenses. If it decreases your monthly expenses, consider putting some of your extra cash toward paying off your debt early. If consolidation increases your monthly expenses, make sure to cut or reduce other items in your budget immediately.
2 
Consider additional actions that will help you get out of the debt loop, like eliminating non-necessities for a few months or more. “My best tip for getting out of debt after consolidating is to establish a repayment plan that requires you to say ‘no’ to some of your current habits,” says Rogers. Try things like canceling subscriptions, deleting your credit card information from retail accounts, and asking a friend or family member to help hold you accountable.
3 
If you open a balance transfer credit card, don’t forget that the 0% APR period will eventually expire. Plan ahead for how you’ll pay off the balance before that happens, otherwise your monthly payments and interest charges could skyrocket.
4 
You can save money on debt payments and build positive momentum by using the debt avalanche method. With this method, you use any surplus cash you have to pay extra toward your highest interest debt. Once that account is paid off, use your surplus cash to pay extra toward the next highest debt. Continue this pattern until all of your high-interest debt is paid off.
5 
If your income increases, or you get a bonus or a tax refund, use the extra money to increase your debt payment and not your spending.
6 
Calculate your debt payoff date based on your new payment schedule. Then, add the date to your calendar. If you hit your goal ahead of schedule, great!
7 
Check in on your debt balances regularly, and be sure to acknowledge when things are moving in the right direction. Rogers suggests setting goals and, as you achieve them, setting new ones. “This will help you remain on the path to paying off debt,” he says.
8 
Still can’t see a way to pay off your debt in the next three years? Try talking to an NFCC-certified, nonprofit credit counselor. These counselors can help you explore all of your options, including nonprofit debt settlement and bankruptcy.
9 
Still can’t see a way to pay off all your debt in the next three to five years? Try talking to a certified credit counselor. A counselor can help you explore all of your options, including nonprofit debt settlement and bankruptcy.
For some people who are struggling with debt, debt consolidation can be a great tool. That’s because consolidation is a strategy that can speed up your journey to becoming debt free, whether by reducing your interest charges, eliminating financing fees or lowering your overall monthly bill payments.
But debt consolidation isn’t right for everyone. To consolidate, you’ll need to qualify for either a new balance transfer credit card, a loan, or a debt management plan, based on factors like your credit scores and income. Even if you qualify, however, there’s no automatic guarantee that consolidating is the best solution.
I would advise everyone to weigh their specific situation along with potential ramifications of consolidating debts, and speak with a financial coach or professional who can help you to outline pros and cons of the debt consolidation process,” says Rogers.
As Rogers points out, no one has to navigate this stressful and confusing situation alone. Whether you’re completely overwhelmed with debt, or you just need a few quick tips, a certified credit counselor can offer professional guidance on the options that make sense for you.
Ultimately, you’ll need good financial habits to help you get out of debt and avoid getting back into it in the future. Rogers says that, regardless of whether or not you consolidate, you’ll need to cut back on expenses and outline your specific goals and targets for paying off debt, if you really want to improve your finances.
Learn to manage your money, minimize debt and stay financially stable.
Debt consolidation can affect your credit scores in a few different ways. In the long term, consolidating debt can help you improve your credit scores, since it gives you a chance to add on-time debt payments to your credit reports and pay down your account balances faster.
In the short-term, however, your scores can drop by a few points for each loan or credit card application you make. You can also lose points when you open and close debt accounts.
You can minimize the damage to your credit scores by using these simple strategies:
Keep your credit card accounts open even after paying them off to maintain a low credit utilization ratio and establish a long credit history.
The difference between a secured and unsecured debt consolidation loan is collateral. A secured loan, like a mortgage or auto loan, is backed by your property as collateral. These types of loans generally have lower APR than unsecured loans, but you risk losing your property if you fall behind on the payments.
Yes, you can refinance a debt consolidation loan. Depending on the interest rate environment and the condition of your credit, refinancing the loan could help you get an even lower APR and reduced fees, or it could do exactly the opposite.
The true cost of refinancing will depend on your circumstances and the lender’s product. Also, note that some lenders don’t refinance their own loans.
Interest rates on personal loans, which can be used for debt consolidation, currently average 11.86% APR. However, your interest rate will depend on factors like your credit scores, income, and the amount of debt you currently owe.
You’re most likely to qualify for a lower rate if you have good credit, stable employment history and relatively little debt compared to your income.
There are important differences between home equity loans and home equity lines of credit (HELoans v HELOCs). With a HELoan, you get a lump sum up-front and pay it back in equal monthly installments. Usually, the interest rates on HELoans are fixed.
With a HELOC, you have a revolving credit account. You can draw from it and pay it down an unlimited number of times during your “draw period,” which is usually 10 years. You may have interest-only payments during this time, and you’ll likely have a variable (or fluctuating) interest rate on the account. After the draw period you’ll enter the repayment period, which usually lasts 20 years.
The amount of time it takes you to receive your loan funds will vary by lender. With some lenders, you might receive your consolidation loan just a few hours after your application is submitted and approved, while others can take weeks. You can usually find an estimate of the timeline on the lender’s website.
Yes, you can apply for a debt consolidation loan online. Many credit unions and banks accept online applications, and you can also apply through online lenders.
1https://wallethub.com/edu/cc/current-credit-card-interest-rates/128285
2https://www.bankrate.com/loans/personal-loans/average-personal-loan-rates/
3https://www.forbes.com/advisor/home-equity/current-home-equity-interest-rates-09-24-26/
4https://www.forbes.com/advisor/home-equity/current-home-equity-interest-rates-09-24-26/
5https://www.freddiemac.com/pmms
6https://www.bankrate.com/loans/auto-loans/average-car-loan-interest-rates-by-credit-score/
Prosper does not provide tax, financial or legal advice and this post is not intended to be tax, financial or legal advice. We recommend that you consult with your financial or tax advisor if you have any questions.
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Eligibility for a home equity loan or HELOC up to the maximum amount shown depends on the information provided in the home equity application. Depending on the lender, loans above $250,000 may require an in-home appraisal and title insurance. Depending on the lender, HELOC borrowers must take an initial draw of $50,000 at closing; subsequent HELOC draws are prohibited during the first 90 days following closing; after the first 90 days following closing, subsequent HELOC draws must be $1,000, or more, except in Texas, where the minimum subsequent draw amount is $4,000.
The amount of time it takes to get funds varies. It is measured from the time the lender receives all documents requested from the applicant and depends on the time it takes to verify information provided in the application. The time period calculation to get funds is based on the first 6 months of 2022 loan fundings, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period.
For Texas home equity products through Prosper, funds cannot be used to pay (in part or in full) non-homestead debt at account opening.
Depending on the lender, qualified home equity applicants may borrow up to 80% – 95% of their primary home’s value and up to 80% – 90% of the value of a second home. In Texas, qualified applicants may borrow up to 80% of their home’s value. HELoan applicants may borrow up to 85% of the value of an investment property (not available for HELOCs).
Home equity products through Prosper may not be available in all states.
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