Debt Consolidation Loans: Run the Numbers Before You Combine

What consolidation changes, and what it doesn't

You take out one installment loan, the lender (or you) pays off your card balances or other debts with it, and from then on you make a single monthly payment at a fixed rate until a set end date. Three things can improve at once: the interest rate, the number of bills you juggle, and the certainty of when you'll be done. Credit cards have none of that. A minimum payment on a card can keep a balance alive for many years.

What consolidation doesn't change is the amount you owe. You still owe every dollar; you've only moved it. The CFPB puts it plainly: if you spend more than you earn, a new loan won't fix that, and you may end up with the loan and new card balances.

The math: $12,000 of card debt, two ways

Say you owe $12,000 across three cards at 22.36%, the August 2026 average for accounts charged interest, and you pay about $420 a month. A lender offers a 36-month loan at 12% interest with a 5% origination fee taken out of the proceeds. To have $12,000 arrive, you borrow $12,630; the fee is $631.50.

Same payment, about $2,200 less in total, and done six months sooner. Now change one assumption. If the only loan you're offered is at 25% APR, you'd pay more than you do on the cards. The break-even point is your current card rate: a consolidation loan has to beat it by a clear margin after the fee. Plug in your own balances with the debt consolidation calculator, and read how origination fees change the APR.

Consolidation loan or balance transfer card?

A balance transfer card moves your card debt onto a new card with a low or 0% introductory rate. It can beat any loan, but only if you can clear the balance before the promotion ends. Fees are usually 3% to 5% of the amount moved.

The CFPB flags two more catches with transfers: new purchases on the same card may get no grace period, and a payment more than 60 days late can trigger a higher rate on the whole balance. If you can afford roughly $700 a month, the card is usually cheaper; if you need a lower fixed payment, the loan fits better. Funditia explains how balance transfer cards work in detail.

Who gets a rate low enough to help

Lenders price consolidation loans like any personal loan: on your credit score, income and existing debt. That creates an awkward fact. People with the most card debt often have high utilization and a lower score, which pushes their loan offers up toward the rates they're trying to escape.

Lenders also look at how much of your income already goes to debt payments. Funditia's debt-to-income guide shows how to work out yours before you apply.

When consolidation backfires

• The cards fill up again. Paid-off cards have their full limits available. Spending on them leaves you with the loan plus new balances, which is worse than where you started.
• The term gets stretched. A five- or seven-year loan can have a comfortable payment and still cost more than paying the cards aggressively for three years.
• The fee eats the savings. On a small balance or a short payoff, a high origination fee can cancel out the lower rate.
• Your house becomes the collateral. Consolidating with a home equity loan can mean a lower rate, but the CFPB warns that unsecured card debt becomes debt that can cost you your home.
• It isn't really a loan. Some companies that advertise "consolidation" are debt settlement firms that tell you to stop paying your creditors. Read debt settlement vs. consolidation before you talk to one.

Before you sign

1. 1 List every debt with its balance, APR and minimum payment, so you know the rate you have to beat.
2. 2 Prequalify with three or more lenders using soft credit checks, and compare APR and total of payments for the same term.
3. 3 Ask whether the lender pays your creditors directly. Some do, which keeps the money from being spent on anything else.
4. 4 Choose the shortest term you can afford, and confirm there's no prepayment penalty so you can pay extra.
5. 5 Have a plan for the cards. Keep them open if you trust yourself, put them away if you don't, and pick a payoff strategy for anything the loan doesn't cover.

Common questions