What is a Debt Consolidation Loan?

A debt consolidation loan is a personal loan you use to refinance debt. You apply for a personal loan (sometimes called a debt consolidation loan) and use the funds to pay off the balance on your credit cards and other debts. You then pay the personal loan back over time.

Debt consolidation loans are a popular way to roll high-interest debt into one single payment. Depending on the interest rate you qualify for and the loan term, debt consolidation may help you save money overall.

How does a debt consolidation loan work?

Debt consolidation lets you merge your separate debts into a single, more convenient monthly payment, ideally with a lower interest rate and term that allows you to save money. 

Debt consolidation loans are personal loans. They are typically fixed-rate, unsecured loans. You use the funds to pay off your other debts. You must then pay off the personal loan. Some lenders will deposit the funds directly into your account while others will pay the debts off directly.

Here is an example of how it works: Imagine you have three credit cards with different balances and different interest rates. These debts can not only be confusing to keep track of, but you may also be paying a lot in interest.

A debt consolidation loan can combine all these credit card balances into one loan with a single, consistent monthly payment and fixed interest rate.

Benefits of debt consolidation loans

Getting a loan to consolidate debt can come with several benefits:

• Pay off your debt faster: Credit card repayment timelines can stretch for years if you only make minimum payments. Debt consolidation loans could speed up this timeline, allowing you to consolidate multiple debts into a single, lower payment that can potentially be paid off faster.
• Simplicity: Debt consolidation loans roll your debt into a single monthly payment. Many debt consolidation loans offer a fixed rate, so you know exactly how much your monthly payment will be for the loan term.

What to look out for with debt consolidation loans

If you’re considering a debt consolidation loan, there are a few things to be aware of:

• Credit score impact: Applying for a debt consolidation loan may lead to a hard inquiry on your credit score. This could temporarily decrease your credit score by a few points. However, consolidating and successfully paying off debt could improve your credit score in the long term.
• Interest rates and loan terms: Qualifying for a lower interest rate doesn’t always mean that you’ll save money overall – this depends on the loan term, too. If you opt for a longer term, you may end up paying more in interest over the life of the loan.
• Spending habits: If you consolidate a high-interest debt but don’t change your habits and continue spending more than you can afford, you could end up in even more debt. A debt consolidation loan can be a helpful tool, but to successfully stay out of debt, you may need to budget and critically examine your spending habits.

Debt consolidation loan interest rates

Interest rates on debt consolidation loans can vary. In general, the better your credit score, the higher chance you have of getting a lower interest rate.

Lenders look for people with a low debt-to-income ratio, which is how much of your gross monthly income goes toward debt payments. Your income can also play into the interest rate and size of loan you’re approved for.

Which types of debt can I consolidate?

Most people use debt consolidation loans for credit card debt, but you can also consolidate other personal loans and, in some cases, medical debt and payday loans.

Deciding whether debt consolidation is right for you

Debt consolidation loans can simplify your finances and potentially provide a path to a debt-free future. However, it’s important to do your research and ensure a debt consolidation loan is the right move for your circumstances.

Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.