If you have substantial debt, juggling several monthly payments and seeing all the interest add up can become overwhelming. Debt consolidation can make repaying these debts more manageable leaving you with a single payment and possibly a better interest rate.

Learn what debt consolidation is, the pros and cons, what this type of loan offers, how to get one and which other options to consider.

What is debt consolidation?

Debt consolidation is the process of paying off multiple balances using a single loan or line of credit. Some of the most popular ways of consolidating debt include debt consolidation loans, balance transfer credit cards and home equity loans or lines of credit.

Whichever one you use, they all involve the simplicity of one monthly debt payment and a single interest rate. Borrowers often seek debt consolidation when they want to simplify their bill payments, pay off the debt faster and get a lower monthly payment or interest rate.

How does debt consolidation work

To consolidate your debt, you need to apply for a new loan or credit line that covers the total amount of your existing debt. Additionally, the debt you want to pay off needs to be unsecured debts such as credit card debt or a payday loan.

Once you decide to consolidate your loans, you must apply for a new loan and meet the lender’s specific criteria. If you have a low debt-to-income ratio (your monthly debt payments divided by your gross monthly income) and a good credit score, banks will offer more options and better interest rates.

Borrowers with poor credit scores, on the other hand, might face challenges in qualifying for this type of loan. While there are debt consolidation loans for those with bad credit, they do charge higher rates and/or may require collateral or a co-signer.

Once you’re approved for a debt consolidation loan, the process for paying off existing debts can vary. In some cases, the new creditor will pay off your creditors directly. Some lenders, on the other hand, will deposit the funds into your bank account or give you access to a credit line you can draw from to pay off creditors yourself.

Remember, it’s important to pay your loan on time to avoid fees, damage to your credit score and, potentially, collateral loss (if your loan was secured by collateral).

A debt consolidation example

Let’s say you have a $3,000 credit card balance, a $2,000 personal loan balance and you still owe $10,000 on your student loans. If you pay an average interest rate of 20.92% for these debts, you’d need to pay $564 a month for three years to pay them off.

You apply for a debt consolidation loan and are approved for a $15,000 loan at an interest rate of 10%. You could then pay off your debt in the same three years, however you’d pay almost $3,000 less in interest.

Pros and Cons of debt consolidation

Debt consolidation offers benefits such as simplified repayment, potential savings and improved financial management. However, it also has drawbacks like potential fees and the need for good credit.


  • One single payment: Debt consolidation helps you streamline your debts into a more manageable payment with only one due date to remember. This can make it easier to avoid late fees that can negatively impact your credit score.
  • Faster debt payoff: A lower interest rate can help you pay off debt faster.


  • Origination fees: Lenders likely will charge origination or balance transfer fees in the case of credit cards. Balance transfer credit cards charge anywhere between 3 to 5% of the debt to be transferred. Note that home equity credit products used for debt consolidation may also involve additional closing costs.
  • Potentially high interest rates: While shopping around may result in you getting a low interest rate, this is not guaranteed, as rates depend on factors like credit history, loan type and your chosen terms. So, if you have blemishes on your credit report, you could end up paying a higher rate than you already do.
  • Extended repayment period: You may need to extend the loan repayment period to keep your monthly payment low and manageable. This means paying more interest over time.

Types of debt consolidation loans

Debt consolidation loans, home equity loans and lines of credit, balance transfer credit cards and student loan refinance can all serve the purpose of consolidating debt and ideally getting better terms. The payment amount, repayment length, interest rates, fees and loan application processes vary for each method.

Debt consolidation loan

A debt consolidation loan is a type of personal loan specifically meant to combine multiple debts into a single loan, typically with a lower interest rate. This type of loan is used to pay off existing debts, such as credit cards, medical bills or personal loans, simplifying the repayment process and potentially saving money on interest payments.

The amounts and repayment terms vary, but lenders will usually let you borrow anywhere from $1,000 to $100,000 and give you between one to seven years to pay the loan back.

As with other loans, you’ll have to go through a credit check, income verification and pay potential fees. Keep this in mind when you research and compare lenders, specifically their rates and fees, to make sure you select the best debt consolidation loan option for you.

Balance transfer credit card

A balance transfer credit card, as its name says, lets you transfer existing credit card and loan balances onto a new credit card with a lower interest rate. Some of the best balance transfer credit cards offer 0% APR during an introductory period of anywhere between 12 and 21 months.

Note, however, that after the promotional period, the regular interest rate will apply and usually be higher than loans meant for debt consolidation. Additionally, most of these cards charge a balance transfer fee, typically between 3% and 5% of the transferred amount.

It’s also important to note that a balance transfer credit card may not provide a large enough credit line to transfer a high amount of debt.

Home equity loans or home equity line of credit

Home equity loans and home equity lines of credit (HELOCs) can be used to consolidate debt by leveraging the equity in a person’s home. They both usually involve closing costs that can constitute as much as 5% of the borrowed amount.

However, home equity loans and HELOCs work differently when it comes to the repayment process, interest rates and how you can use the funds.

A home equity loan has a fixed rate and repayment terms. It pays out the loan amount in a lump sum, allowing homeowners to consolidate their debts, then make predictable payments. On the other hand, a HELOC offers a revolving line of credit, similar to a credit card, where borrowers can access funds as needed (up to a predetermined credit limit) and only pay interest on the borrowed amount.

Home equity loans and HELOCs both come with the risks involved with using your home as collateral — in other words, if you default on your loan, you could lose your home. Therefore, you should evaluate the terms, interest rates, repayment options and personal financial situation carefully before opting for a home equity loan or HELOC to consolidate your debts.

Student loan refinance

Consolidating multiple student loans into a single loan can have its advantages: it simplifies your repayment and you might secure a lower interest rate if your credit score has improved or if overall interest rates are lower. This can lead to significant savings over the life of the loan, making it a great option for borrowers who want to reduce their bills.

However, refinancing your federal student loans means your new loan will be from a private lender. Therefore, you’d be giving up the benefits that come with federal loans, such as the student loan forgiveness programs or the student loan payment pause that has been in effect since the start of the covid pandemic.

In contrast, if you have a mix of federal and private student loans, refinancing offers several benefits. Not only can you take advantage of consolidating your debts into a single monthly payment, you can also choose a repayment term that works best for your current financial situation.


This article was written by Ashley Donohoe from Money and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.

The opinions expressed within this article is that of Ashley Donohoe and not that of M&T Bank, nor does M&T Bank endorse the opinions.

This article is not intended to provide tax, legal, accounting, financial, or other professional advice. Always consult a qualified professional about your personal situation. 

Note from M&T: Visit our Lending Calculator Library page. Our debt consolidation calculators can help you decide if debt consolidation is right for you. Lending Calculator Library | M&T Bank (mtb.com)

Explore our lending options to find out which solution works best for your financial situation. Personal Mortgages & Loans | M&T Bank (mtb.com)

All loans and lines of credit are subject to credit approval. Additional terms and conditions may apply, depending on the type of collateral and other terms offered or chosen.