Ready to say goodbye to student loan debt for good? Learn More
2020 Best Invention

Debt Consolidation – 5 Things You Should Know

5 minute read Upsolve is a nonprofit tool that helps you file bankruptcy for free. Think TurboTax for bankruptcy. Get free education, customer support, and community. Featured in Forbes 4x and funded by institutions like Harvard University so we'll never ask you for a credit card. Explore our free tool

In a Nutshell

Debt consolidation does not erase debt, but it can be helpful in reducing your interest rate on debt you owe.

Written by Jonathan PettsLegally reviewed by Attorney Andrea Wimmer
Updated October 30, 2021

Debt consolidation means taking on new debt and using it to pay off existing debt. It doesn’t erase the debt. Instead, it’s a financial management tool. The goal of every consolidation is to pay less interest. If you have a manageable amount of debt and good credit, debt consolidation can put you on a track to pay off your debts in full. 

Why Does Debt Consolidation Work? 

Done right, a debt consolidation lowers the monthly debt repayment amount. This in turn means that you’ll have more money in your budget to spend on living expenses. Ideally, a debt consolidation loan also reduces the total interest rate you pay on the debt. Since interest is literally the “price you pay for borrowing money,” it makes it cheaper for you to pay off your debt. 

Of course, that means that your creditworthiness and credit history will play a role in whether a debt consolidation will work for you. Qualifying for low-interest types of debt usually requires a good credit score. 

How Does Debt Consolidation Work? 

Consolidating your debts is a lot like refinancing because you're paying off existing debt in a lump sum. Two things happen in a debt consolidation: 

(1) You take on new debt

(2) You pay off old debt

The old debt is typically high-interest unsecured debt - often in the form of credit card debt. The new loan amount is equal to the current debt amount, plus an origination fee or transfer fee. The new loan has an annual percentage rate that is lower than the debt you're paying off with it. Because the new loan has a lower interest rate, it also has a lower monthly payment. 

So, while doing a debt consolidation doesn't mean you'll be debt free immediately, it does improve your financial situation significantly. Your loan payment is more manageable than the single payment for each one of your credit card accounts. You only have to worry about one due date every month which will help you avoid late fees. Finally, you'll be in a position to pay off your outstanding debt in a shorter amount of time than you could ever pay off your old debt with higher interest rates. 


Current DebtConsolidation Loan
Total Debt$10,000$10,000
Interest Rate22%7%
Minimum Payment$250$200
Time to Pay Off71 months (~ 6 yrs)59 months (<5 yrs)
Interest Paid$7,750$1,800
Money Saved--$5,950 total SAVINGS

To find out how this would work for your current debt load, check out Upsolve’s Debt Repayment Calculator

Upsolve User Experiences

2,071+ Members Online
Lee Powers
Lee Powers
★★★★★ 7 hours ago
The last thing that you want to do, when you can’t pay those ridiculous credit cards, is to pay an attorney$$$$ to help to not pay those cards. This is where this organization comes in. If you look up all the paperwork that goes into filing a Bankruptcy Case it will blow your mind! Questions quickly come up like …What do I need / What don’t I need. So because my Brother had just filed $2000 with an attorney. He discovered after about this Upsolve organization, and let me say… it is a very good thing. You answer a bunch of questions it takes a while and then after they have there team Kind LAWYERS look at it couple weeks, you print out and sign and file it, I mailed it into the Court. It is important to follow their checklist, which includes the credit counseling, that all Courts Require. Thank you 🙏 Upsolve Team
Read more Google reviews ⇾
Connor Norris
Connor Norris
★★★★★ 1 day ago
thanks guys. what an amazing service. its inspiring in that its free and ultimately for the benefit of all.
Read more Google reviews ⇾
Erin Brianne
Erin Brianne
★★★★★ 1 day ago
very helpful. i couldn't have filled all that paperwork out on my own
Read more Google reviews ⇾

Methods of Consolidation

There are a number of ways to consolidate your credit card debt into one monthly bill. Here are the four most popular.

Credit Card Balance Transfer

Credit card companies offer balance transfers to borrowers with good credit scores. While there is an origination fee for credit card balance transfers, many have low interest rates or even an annual percentage rate of 0%. These balance transfers are usually combined with repayment terms that change after a promotional period expires, though some credit card companies simply offer a lower fixed rate that doesn't change. 

Personal Loans

Another approach is getting an unsecured bank loan at a lower interest rate and better repayment terms. You can even use personal loans to pay off medical bills as the money is usually disbursed to you to spend as you see fit. 

We recommend first checking a local credit union for the loan. Credit unions will generally offer lower rates and more flexible terms than online lenders, particularly if you have a poor credit score. Credit unions can never charge more than 18% by law.

Online lenders like LendingClub or LendingTree may have low rates for those with excellent credit, but their rates go up to 36% for those with poor credit. Online lenders also may charge upfront fees for originating the loan, ranging from 1 to 3%.

The advantages of online lenders are they offer the loan without a “hard inquiry” on your credit report, so it won’t affect your credit score the way a consolidation loan from a credit union probably will.

Home Equity Loan or Home Equity Line of Credit

Another method for debt consolidation exists for homeowners. You can take out a home equity loan or a home equity line of credit (sometimes called a HELOC) with a fixed interest rate and use that money to pay off your credit cards or other debts. You then repay the loan over a fixed time period. Since this type of loan is secured by your house, however, it is risky. If you fail to repay it, you could lose your home.

Debt Management Plan

A debt management plan is a good debt consolidation option if your credit score is not good enough to get favorable repayment terms in a credit card balance transfer or personal loan. 

To learn more about debt management plans, set up a free credit counseling session with a nonprofit organization in your area. A credit counselor will review your financial situation with you and make a recommendation. One recommendation may be a debt management plan. 

It’s similar to a debt consolidation in that you only have one monthly payment. But, you don’t take on any new loans. Instead, you work with the credit counseling organization, who in turn negotiates with the credit card companies. It’s not debt settlement, because you still end up paying off your debt. But, credit counselors are often able to negotiate better repayment terms as part of a debt management plan. 

Not all types of debt are well suited for a debt management plan. Credit counseling agencies have relationships with credit card companies, banks, and maybe even credit unions, but they won’t have a good way of negotiating your medical bills or student loans for you. 

When Does Debt Consolidation Make Sense?

Debt consolidation only makes sense if the following is true:

  • You have at least $5,000 in total debt

  • Your total debt is under 50% of your annual income

  • You have good-to-excellent credit to qualify for a balance transfer credit card or a low-interest personal loan or you find a debt management plan that works for you

  • You make enough money each month to make debt payments

  • You know you you can prevent running up debt in the future

And make sure you know who your creditors are! If you don’t remember, don’t worry. Try checking out your credit report for that information.

When Is Debt Consolidation a Bad Idea?

Debt consolidation is not always a good idea. It won’t fix your financial problems if:

You have an excessive spending habit. Consolidation is not a magic pill for all your financial worries. If you have poor spending habits and aren’t sticking to a reasonable budget, you will likely fail to repay your consolidation loan or line of credit. And consolidation will only further weaken your finances. Consolidation only makes sense if you have a plan to avoid getting into debt in the future.

You are buried in debt. If your total debt is over half your annual income, then consolidation likely won’t be effective. You may need to explore more vigorous debt relief options like  Chapter 7 bankruptcy.

You have less than $5,000 in debt. If you have a very small amount of debt that can be paid off in under a year at your current pace, consolidation will not be effective. In this case, you only save a small amount on interest and would still have to pay fees associated with consolidation, so it would not be worth it.

Let’s Summarize...

If you owe a manageable amount of debt and have good credit, debt consolidation is an important tool worth considering. Debt consolidation does not erase debt, but it can be helpful in reducing your interest rate on debt you owe. We suggest using the nonprofit Greenpath for debt consolidation to help you think through the options if that is the direction you choose. They’ve prepared this resource on how to get started: Looking To Get Out of Debt in 2019? Here’s How to Start.

If debt consolidation does not sound like the right choice for you, maybe it’s time to consider bankruptcy and get a fresh start in the form of a bankruptcy discharge

Written By:

Jonathan Petts


Jonathan Petts has over 10 years of experience in bankruptcy and is co-founder and CEO of Upsolve. Attorney Petts has an LLM in Bankruptcy from St. John's University, clerked for two federal bankruptcy judges, and worked at two top New York City law firms specializing in bankrupt... read more about Jonathan Petts

Attorney Andrea Wimmer


Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

It's easy to get help

Choose one of the options below to get assistance with your bankruptcy:

Free Web App

Take our screener to see if Upsolve is right for you.

Take Screener
12,715 families have filed with Upsolve! ☆

Private Attorney

Get a free bankruptcy evaluation from an independent law firm.

Find Attorney

Learning Center

Research and understand your options with our articles and guides.

Go to Learning Center →

Already an Upsolve user?

Read Support Articles →

Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can't access their basic rights when they can't afford to pay for help. Combining direct services and advocacy, we're fighting this injustice.

To learn more, read why we started Upsolve in 2016, our reviews from past users, and our press coverage from places like the New York Times and Wall Street Journal.