What can I use a debt consolidation loan for?

Rebecca Betterton

Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.

Key takeaways

  • Debt consolidation can be an effective way to manage and pay off multiple forms of debt, such as credit card debt, student loans and medical debt.

  • Pros of debt consolidation include a more predictable monthly payment, shorter repayment period and potential to improve credit score.

  • Cons of debt consolidation include potential high loan fees, higher risk of overspending and potential damage to credit score.

  • Other types of debt consolidation include balance transfer credit cards, home equity loans and debt management plans.

If you are one of the Americans impacted by growing inflation and thus increased debt, consolidating might be a good financial move. But debt consolidation is not a cure-all and may not be the best choice for every type of debt you may have.

Primarily, debt consolidation can be used for credit card, medical or student debt. Consider how to take advantage of this process and the requirements that accompany it.

Help

What is a debt consolidation loan?

A type of loan that combines several different debts into one. This way you only have to manage one payment each month, reducing the cost.

Debt consolidation loan uses

There are many different ways to go about refinancing your debt. These range from a balance transfer card, a home equity loan, a personal loan or a debt management plan. Before setting out to determine which type of debt consolidation approach is best for your needs, it is important to consider how the types of debt impact your chosen route.

Credit card debt

If you have a few cards in your wallet that are carrying balances outside of your budget, consolidating them into one payment can help lessen the burden. All of these cards will likely have different interest rates, so if you are able to qualify for a new loan with a more competitive rate, you will save money in both fees and overall interest.

Student loan debt

Consolidating your student loans takes the funding from different sources and refinances them into one monthly payment. There are two ways to go about this, depending on the source of your educational funding.

For borrowers who received money via a federal loan, you can consolidate directly with the Department of Education. Those who had more than one federal loan or private loan will undergo a process known as refinancing.

Medical debt

Many times, medical costs come up unexpectedly and can build up while you’re focused on your health or that of your loved ones. If this is the case, consolidating it can make it much easier to pay off at once.

Before moving ahead with this approach, make sure you can afford the interest rates you will be charged. Even if your monthly cost is less, it is possible you will pay more over time due to built interest.

Benefits and drawbacks of debt consolidation loans

Securing a debt consolidation loan can be an excellent way to handle paying down your debts, but the move comes with risk. Consider the benefits and drawbacks that a debt consolidation loan carries.

Green circle with a checkmark inside
Green circle with a checkmark inside

Pros

  • A more predictable monthly payment.

  • Much shorter repayment period.

  • Less money spent on interest.

  • Potential to improve credit score.

Red circle with an X inside
Red circle with an X inside

Cons

  • Potential high loan fees.

  • Higher risk of overspending.

  • May not be afforded best rates.

  • Potential damage to credit score.

When to take out a debt consolidation loan

A debt consolidation loan may make sense in a few cases, all of which revolve around the previously outlined benefits.

  • You have a good or excellent credit score. Many personal loans, including debt consolidation loans, require you to have a credit score of 670 or better to qualify. The lowest rates go to those with the highest credit scores.

  • You have trouble tracking your monthly payments. Combining your debts under a debt consolidation loan will take multiple payments and combine them into one.

  • You can get a better interest rate. Before you decide if a debt consolidation loan is right for you, prequalify with at least three lenders. This will help you determine if taking out a debt consolidation loan is worth it without affecting your credit.

  • You want to pay off your debt faster. By consolidating your debt, you may be able to shorten the time it takes to pay it off. Personal loans typically come with terms from 24 to 72 months.

Other types of debt consolidation

A debt consolidation loan isn’t the only form of debt consolidation available. Depending on how much debt you have, another option may make sense.

  • Balance transfer credit card. You may be able to get a balance transfer credit card with a promotional zero percent interest rate. The promotion rate can last between 15 and 21 months.

  • Home equity loan. This type of loan is secured by your home. While rates have historically been lower than personal loans, they are now about the same. If you can qualify for a lower rate, it may be worth the risk of using your home as collateral.

  • Debt management plan. A credit counselor or debt relief company may be able to negotiate a payoff plan with your creditors. A debt management plan will require you to close all credit cards and make a monthly payment to the agency you’re working with.

The bottom line

The decision to sign off on another loan in order to pay down current debt can be a risk for some. Before agreeing to a debt consolidation loan, consider other options for debt consolidation, and when shopping, pay close attention to APR, minimum monthly payments and income requirements.

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