If you are carrying balances on multiple credit cards or loans, keeping track of due dates, interest rates, and minimum payments can feel overwhelming. Debt consolidation — the process of combining several debts into a single loan with one monthly payment — is one of the most popular uses for personal loans in 2026, and for good reason. When done right, it can simplify your finances, lower your overall interest costs, and help you pay off what you owe faster.
This guide walks through how debt consolidation works, when it makes sense, how to decide if it is right for your situation, and what to watch out for along the way.
What Is Debt Consolidation?
Debt consolidation means taking out a new loan to pay off multiple existing debts. The Consumer Financial Protection Bureau (CFPB) recommends that borrowers carefully compare terms before consolidating. Instead of juggling several payments each month — each with its own interest rate, due date, and minimum — you make one payment on the new loan. The goal is typically to secure a lower interest rate than what you are currently paying, reduce your monthly payment, or both.
Personal loans are the most common vehicle for debt consolidation. Unlike balance transfer credit cards, which often come with promotional periods that expire, a personal loan gives you a fixed interest rate and a set repayment timeline from day one. You know exactly what you will pay each month and exactly when the debt will be gone.
Why Debt Consolidation Is So Popular Right Now
According to TransUnion industry data, more than half of all personal loan borrowers use their loan for debt consolidation or credit card refinancing. That share has remained remarkably consistent even as borrowing costs have shifted over the past several years.
The math behind this trend is straightforward. The average credit card interest rate in early 2026 hovers above 20 percent for most cardholders. Meanwhile, personal loan rates average around 12 percent for borrowers with good credit, and qualified borrowers with excellent credit can find rates in the single digits, per Bankrate’s latest rate data. That gap between credit card APRs and personal loan APRs is where the savings come from.
Consider a simple example: if you owe $15,000 across three credit cards at an average rate of 22 percent and you consolidate into a personal loan at 11 percent over four years, you could save thousands of dollars in interest and pay off the full balance on a predictable schedule.
When Debt Consolidation Makes Sense
Debt consolidation is not a magic solution for every financial situation, but it works well under the right circumstances. It tends to make the most sense when you are carrying high-interest debt across multiple accounts, when you can qualify for a personal loan at a meaningfully lower rate than your current debts, when you have a steady income that supports the monthly payment, and when you are committed to not running up new balances on the credit cards you pay off.
That last point is critical. Consolidation only works if you address the spending habits that created the debt in the first place. Paying off credit cards with a personal loan and then charging those cards back up leaves you worse off than before, with both the loan payment and new card balances to manage.
When It Might Not Be the Right Move
There are situations where debt consolidation may not help or could even be counterproductive. If your credit score is low enough that you can only qualify for a personal loan rate that is similar to or higher than your existing rates, consolidation will not save you money. If you are struggling to make minimum payments and a consolidation loan would not meaningfully reduce your monthly obligation, you may need to explore other options like a debt management plan or credit counseling.
Similarly, if the total amount of debt you want to consolidate is relatively small — a few hundred dollars across two cards, for instance — the origination fees on a personal loan could offset any interest savings. In those cases, focusing on aggressive repayment of the existing balances may be more practical.
How to Consolidate Debt With a Personal Loan: Step by Step
The process is more straightforward than many borrowers expect. Start by listing all the debts you want to consolidate, including the balance, interest rate, and monthly payment for each. Add up the total — this is the loan amount you will need.
Next, check your credit score. Most lenders offer the best rates to borrowers with scores of 670 or above, though many lenders work with borrowers across the credit spectrum. Knowing your score gives you a realistic expectation of the rates you will be offered.
Then, shop around and compare offers from multiple lenders. Most personal loan lenders allow you to pre-qualify with a soft credit check, which means you can see estimated rates and terms without affecting your credit score. Compare the APR (which includes fees), the monthly payment, the repayment term, and any origination fees.
Once you choose a lender and are approved, the loan funds are typically deposited into your bank account within a few business days. Some lenders will even pay your creditors directly. Use the funds to pay off your existing debts in full, then focus on making your single monthly loan payment on time.
What to Look for in a Debt Consolidation Loan
Not all personal loans are created equal, and a few key factors can make a significant difference in how much you save. Pay close attention to the APR, which reflects the true cost of borrowing including any fees. A loan with a slightly higher interest rate but no origination fee can sometimes be cheaper overall than a lower-rate loan with a 3 to 5 percent origination charge.
Look at the repayment term as well. A longer term means lower monthly payments but more interest paid over the life of the loan. A shorter term costs more each month but saves money in total interest. The right balance depends on your budget and how aggressively you want to eliminate the debt.
Check whether the lender charges prepayment penalties. Most personal loan lenders do not, but it is worth confirming. If your financial situation improves and you want to pay off the loan early, you should be able to do so without extra costs.
The Impact on Your Credit Score
Debt consolidation can affect your credit in several ways. In the short term, applying for a new loan results in a hard credit inquiry, which may cause a small, temporary dip in your score. Opening a new account also lowers the average age of your credit accounts.
However, the longer-term effects are generally positive. Paying off credit card balances significantly reduces your credit utilization ratio — the percentage of available credit you are using — which is one of the most influential factors in your credit score according to Experian. Consistently making on-time payments on your consolidation loan also builds a positive payment history. Many borrowers find that their credit score improves within a few months of consolidating.
Alternatives to Personal Loan Consolidation
A personal loan is not the only way to consolidate debt. Balance transfer credit cards offer 0 percent introductory APR periods, typically lasting 12 to 21 months, which can be useful if you can pay off the balance before the promotional rate expires. The risk is that any remaining balance after the intro period reverts to a high standard rate.
Home equity loans and home equity lines of credit (HELOCs) offer another option for homeowners. These products typically carry lower interest rates because they are secured by your home, but they also put your property at risk if you cannot make payments. For borrowers who are significantly struggling with debt, nonprofit credit counseling agencies can help create a debt management plan that may include negotiated lower rates from your creditors.
Tips for Success After Consolidating
The loan itself is only half the equation. To make consolidation truly work, set up automatic payments on your new loan to avoid missed due dates. Create a budget that accounts for the monthly payment and prevents new debt accumulation. For more strategies, see our guide to debt management. Consider freezing or putting away the credit cards you paid off rather than closing the accounts, since closing them can reduce your total available credit and hurt your utilization ratio.
Build an emergency fund, even a small one, so that unexpected expenses do not send you back to credit cards. Even setting aside $50 per month creates a buffer that can break the cycle of relying on high-interest debt for surprises.
References
- Consumer Financial Protection Bureau — What Do I Need to Know About Consolidating Credit Card Debt?
- Federal Reserve — Consumer Credit Statistical Release (G.19)
- TransUnion — Personal Loans Industry Insights
- Experian — What Is a Credit Utilization Rate?
- Bankrate — Average Personal Loan Interest Rates
- Federal Trade Commission — Coping With Debt
The Bottom Line
Debt consolidation through a personal loan remains one of the most effective strategies for managing high-interest debt in 2026. With credit card rates well above 20 percent and personal loan rates significantly lower for qualified borrowers, the potential savings are real and substantial. The key is to approach it with a clear plan: know your numbers, compare multiple lenders, choose a loan that genuinely improves your situation, and commit to the financial habits that keep you out of debt for good.
