The Ultimate Guide to Debt Consolidation


Debt consolidation, explained

Debt consolidation is a strategy for managing debt that involves using a new loan, credit card or payment plan to pay off your existing debts. When you consolidate, you’ll roll multiple existing accounts into one new account. Ideally, this will 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 thats going on with your life. If youre 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 dont feel capable of managing separate debts and prefer to pay one big bill versus multiple bills.

— A. Jackie Cummings Koski, CFP®, AFC®

Debt consolidation can potentially help if you want to accomplish any of the following

Reduce the number of monthly debt payments 

Secure lower interest rates 

Reduce the total amount you pay each month 

Eliminate creditor fees 

​​​Consolidating debt can also help you end a relationship with a bad creditor, assuming you pay off the remaining balance you owe them.

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, you’ll have to qualify based on certain details of your income and debt.

Take control of your debt

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.

The best types of debt to consolidate 

In particular, debt consolidation is a good strategy when it comes to paying off high-interest accounts like credit cards. That’s because consolidating your debt can potentially move your outstanding balance to a loan with a much lower interest rate.

For example, the average APR for a credit card is over 21.47%, while a personal loan has an average APR of around 12.35%. 

Types of debt to avoid consolidating

You’ll generally want to avoid consolidating low-interest debt, like mortgages and car loans. These types of loans, which are secured by collateral, usually have relatively low interest rates.  

Additionally, mortgage lenders may offer hardship assistance to borrowers struggling with their mortgage debt. 

Here's a look at the average APR rates as of January 2024 for different types of financing:

Credit Card 21.47%
Personal Loan 12.45%
Debt Consolidation Loan 12%
Home Equity Line of Credit 9.18%
Home Equity Loan 8.91%
Auto Loan 8.15%
Mortgage 6.69%

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®

Most federal student loans are eligible for income-driven repayment plans, sometimes with payments as low as $0. If your 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 or setting up an interest-free monthly payment plan.

Eight ways to consolidate debt

There are several ways to consolidate debt, but each one has its own benefits and requirements. Here’s a look at our top recommendations:

  1. Personal loan

    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.

  2. Home equity loan (HELoan) or line of credit (HELOC)

    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 your finances are unstable then you risk the loss of your home." Other drawbacks to HELOCs include rising interest rates and loss of home equity. 

  3. Reverse mortgage

    Similar to home equity loans, a reverse mortgage or home equity conversion mortgage (HECM) lets you cash out some of your home equity. But these loans usually come at a much higher cost than HELoans and HELOCs, and they're only available to homeowners 62 years of age or older. You don't have to make monthly payments on a reverse mortgage, but you may have to pay origination fees up to $6,000, plus closing costs and a mortgage insurance premium, and the balance on the loan will increase as interest and fees accrue each month. Then, when you move or pass away, the home will likely have to be sold to pay off the debt. 

  4. Direct Consolidation Loan

    If you have multiple student loans from the federal government, you might consider applying for a Direct Consolidation Loan through the Department of Education. 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 income-driven repayment plan or federal loan forgiveness program, all at no additional cost to you. 

  5. Balance transfer credit card

    Balance transfer credit card can help you pay down debt more aggressively, since it comes with an introductory 0% APR period—usually for one year or more. 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% ​​balance transfer fee on the amount you consolidate as well, and the card may have an annual fee. 

  6. 401(k) loan

    Taking out a 401(k) loan may seem the same as pulling money out of your savings, but it's far more expensive. Yes, taking money from your 401(k) can help you consolidate debt, but it converts your retirement savings into even more debt. Not only will you have to repay the money, but you may have to pay taxes on the loan, plus a 10% tax on the amount you borrow if you're under the age of 59.5, and you may have to repay the full loan balance if you lose or leave your job. Plus, you'll lose out on some of the interest you can earn before retirement. 

  7. Debt management plan (DMP)

    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 ​​three to five years. Unlike loans and credit cards, good credit isn't a requirement to go on a DMP, but you may not be able to include all of your debts on the plan. Once you're enrolled, some of your creditors may give you a ​​reduction in your interest rates or late fees, 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 a fee waiver based on their income. 

  8. Borrow from friends or family

    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.

Turn your home equity into cash—fast

Maximize your home’s equity with financing options like HELOCs and HELoans. Get the funds you need for debt consolidation, home improvements or family expenses today.


Debt consolidation requirements 

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 scores

When 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 score is, 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 a credit score of 640 or higher.

Employment history

Creditors will look at income and employment to determine what you can afford and how much credit you qualify for. For example, 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 repay the loan.

Debt and income

Lenders might look at your debt-to-income ratio (DTI), which is calculated by adding up all of your minimum monthly debt payments and dividing that figure by your gross monthly income. You can use this formula to calculate your DTI:

Debt-to-Income (DTI) Formula
        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:

Sample DTI calculation
        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 high income compared to your debt, and therefore you have a better chance of being approved for a loan. Many lenders won't approve you if your DTI is above 43%, according to Equifax. There's a chance you may need to find another way to pay down debt, or increase your income, before you can qualify for a loan.

Home equity

For HELoans and HELOCs, your home equity will also come into play. In other words, your home should be worth more than the balance you owe against it. You're more likely to qualify for one of these products if you've paid off at least ​​​​15% to 20% of your home's value before applying.

Factors to consider when choosing a debt consolidation option

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®

To calculate the cost of debt consolidation and find out if it will truly save you money, you’ll have to compare the following information across lenders and products:
  • APR
  • Length of repayment
  • Cost of interest-only payments (if applicable)
  • Lender fees, including origination fee, application fee, closing costs or otherwise
  • Credit score requirements
  • Minimum and maximum loan amount or credit limit

Discover your potential savings

Try our loan calculator to estimate your monthly payment and APR before applying for a debt consolidation loan.

Don’t worry if consolidating seems overwhelming. It’s just basic math. By carefully comparing the numbers and selecting 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:

Sample cost of financing before consolidation
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
Sample cost of financing after debt consolidation
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.

How to consolidate your debt 

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:

  1. Define your goal

    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.

  2. Calculate your debt

    Add up the total amount of debt you want to pay off, that way you'll know how much financing to look for.

  3. Review your credit

    Pull your free credit reports to see if there are any errors that need to be fixed or other issues that need to be improved. 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.

  4. Research and compare options

    Look at different types of creditors to see what they have available. Be sure to include your bank or credit union, since they may offer special incentives to customers. You can easily broaden your search by trying (reputable) online lenders, too.

  5. Get prequalified

    Getting prequalified for a loan or credit card can allow you to see a rate quote from a creditor without a hard credit pull, meaning 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 negotiate the best rates.

  6. Apply

    Once you've honed in on the best offers, submit your applications. Be prepared to provide your contact information, proof of income and details about your debt.

  7. Pay your pre-existing 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.

  8. Start payments on the new account

    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.

Manage your finances with ease

Consolidate high-interest debt, finance home upgrades or pay for healthcare in just a few steps with a personal loan through Prosper.

Pros and cons of debt consolidation

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 payments: When you use debt consolidation to pay off multiple accounts, you roll all of the payments into one and have fewer accounts to monitor and manage.

  • Improve your credit: Consolidating can help you pay off debt faster, accelerating growth in your credit scores.

  • Spread out payments: Consolidation can also allow you to extend the length of your debt repayment, bringing down your total monthly payment amount and helping you balance your budget.

  • Avoid debt settlement: Consolidating debt can help you avoid predatory alternatives like for-profit debt settlement, which can put you at risk of everything from tanking your credit to facing legal issues, without even lowering your overall debt.


  • 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 charge you a fee if you pay off your debt before the scheduled payoff date.

  • 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 set payoff date.

  • 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.

Managing your debt after 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 it go away. If you want to be debt free once-and-for-all, you may need a new approach to ​​financial planning.

“The biggest mistake individuals make when consolidating debt is sticking to bad habits. Anytime 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 and move past your bills.


Update your budget

Consolidation can change your monthly expenses. If consolidation decreased your monthly expenses and as a result you have extra cash, consider putting some of that money toward paying off your new loan early. If consolidation increased your monthly expenses, make sure to adjust other items in your budget immediately.



Avoid new debt

Consider additional actions that can help you get out of the debt loop, like eliminating non-necessities for a few months or even longer. “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.


Keep introductory periods in mind

If you open a balance transfer credit card, don’t forget that the 0% APR period will eventually expire. If you don’t have a plan for paying off the balance at that time, your monthly payments and interest charges could skyrocket.


Use the debt avalanche

You can save money on debt payments and build positive momentum by using the debt avalanche method. With this method, you’ll use any surplus cash you have to pay extra toward your highest interest debt. Once that account is paid off, you’ll roll the funds over to the next highest debt until all of your debts are eliminated.


Increase payments when possible

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.


Schedule a payoff date

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!


Track your progress

Check in on your debt balances regularly, and be sure to acknowledge when things are moving in the right direction. “Monitor your progress and celebrate the milestones along the way,” suggests Cummings Koski. “Beyond your finances, think about how you feel as you’re conquering your goal of getting out of debt,” she says. 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.


Start an emergency fund

Lay the foundation for a debt-free future by setting money aside for emergencies on a regular basis, even if it’s just $25 per paycheck. “This emergency fund could help you out of a bind and possibly help you avoid taking on additional debt,” says Cummings Koski.


Get help if you need it

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.


Is debt consolidation right for you?

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 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. 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.

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Debt consolidation can affect your credit scores in a few different ways. In the short-term, your scores can drop by a few points for each loan or credit card application you make, and you may lose even more points as you open and close debt accounts.

You can minimize the damage to your credit scores by using these simple strategies:

  • Get prequalified (without a hard inquiry into your credit) by multiple creditors, and then selectively apply for the best offers.
  • Make all of your credit card or loan applications within the 14-day “rate shopping” window.
  • Keep your credit card accounts open even after paying them off to maintain a low credit utilization ratio and establish a long credit history.

In the long term, consolidating debt can 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.

The difference between a secured and unsecured debt consolidation loan is collateral. A secured loan, like a home equity loan or a car loan, generally has a lower APR than an unsecured loan, but you’re required to use your property as collateral. Secured loans put you at risk of losing your property if you fall behind on payments. 

Yes, you can refinance a debt consolidation loan. Depending on the interest rate environment and your credit characteristics, refinancing the loan could help you get an even lower APR or reduce fees, or it could result in a higher interest rate and different repayment terms.
It 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, average 12.43%. The interest rate will depend on factors like your credit, income, the amount of debt you currently owe, and whether or not you can negotiate lower rates with the creditor.  
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 can last from 10 to 20 years. 


  • Jackie Cummings Koski: Financial Educator and Consultant
  • Dr. Gilbert Rogers: Senior Assistant Director of Financial Wellness at University of Oregon

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The Prosper® Card is an unsecured credit card issued by Coastal Community Bank, member FDIC, pursuant to license by Mastercard® International.


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.  

All home equity products are underwritten and issued by Prosper’s Lending Partners. Please see your agreement for details. 

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