4 Ways to Consolidate Your Personal Loans in 2023

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Properly executed, consolidation can rid you of debt at a faster clip.


Key points

  • The goal of consolidation is to secure a lower interest rate and save money.
  • Consolidation is useless unless you refrain from borrowing.

Credit card debt, bank loans, car payments, and payday loans are all types of personal debt. Because repaying interest eats up such a large portion of your monthly payment, the only ones getting rich are the lenders.

If it feels as though you’re caught on a hamster wheel of debt and can’t get off, debt consolidation may be the answer you’re looking for.

How consolidation works

Imagine that you owe $10,000 on your vehicle, $10,000 on credit cards, and another $10,000 on a new roof you financed a few years ago. That’s a total of $30,000. With a consolidation loan, you shop around until you find a lender with a lower interest rate than you’re currently paying. You also look for a lender that doesn’t charge “junk fees,” like origination or administration fees.

Discover: These personal loans are best for debt consolidation

More: Prequalify for a personal loan without impacting your credit score

Once you find a loan that fits the bill, you apply. Depending on which type of consolidation loan you decide upon, the lender may run a hard credit check. If approved, the lender will let you know the details, including your interest rate and payment terms.

Let’s say you’re currently paying an average rate of 17% on the $30,000 of debt but you’re offered a fixed rate of 9% for 60 months. Here’s how much money you could save:

Interest Rate Monthly Payment Total Interest Paid Amount Saved
17% $746 $14,735 N/A
9% $623 $7,365 $7,370

Source: Author’s calculations

If you want to pay off your debt even faster and save more, you could keep paying the $746 payment even after consolidating the debt at 9%. Doing so would mean paying it off in full in 44 months and paying $5,313 in interest. That’s a total savings of $9,422.

Any way you look at it, $9,422 is a lot of money to invest in the future or put away in an emergency savings account. However, there’s more than one way to consolidate debt. Here are four of them.

1. Personal loan

Even if one of the debts weighing you down is a personal loan, you can always take out another — better — loan to pay it off. In fact, you can combine that debt with debt from other sources, like high-interest credit cards and auto loans.

Taking out a personal loan is quite straightforward. As mentioned, you apply for a loan after shopping around for the one that best suits your needs. Once approved, the bank deposits the funds into your checking account and you use the money to pay off existing debts. Now, instead of several debts, you have only one to focus on.

2. 0% balance transfer

If you have a strong credit score, a credit card with a 0% promotional rate can be a great tool for paying off existing credit card debt fast. Better yet, as long as you pay it off before the promotional rate expires, you’ll pay no interest.

Typically, these promotional rates only last somewhere between 12 and 18 months, so you have to go into the transfer with a strong plan.

Let’s say you owe a total of $18,000 to several different credit card companies and snag a 0% balance transfer promotion that lasts 18 months. By making a $1,000 payment on the card each month, you’ll have it paid off before the promotion expires. If you allow it to expire, though, the interest will jump up to a standard rate, which can easily be 20% or more.

Balance transfers are best for those who know they can afford to wipe the debt out in a relatively short period of time.

3. Home equity

Depending on the interest rate you’re offered, tapping home equity can get you out from under high-interest debt at a lower cost. For example, if you’ve used credit cards and personal loans to pay for things like travel, a wedding, or home improvements, a home equity loan allows you to consolidate those debts into one.

For your safety and the safety of the lender, you can’t borrow all the equity in your home, but you can borrow part of it. Let’s say your home appraises for $400,000 and you have a mortgage balance of $250,000. That leaves you with $150,000 in equity. Most lenders will allow you to borrow up to 85% of available equity, meaning the maximum you could borrow is $127,500 ($150,000 x 0.85 = $127,500).

The good news is that loan terms on a home equity loan can range anywhere from five to 20 years (although 30 years is not unheard of). That means you can keep your monthly payments low.

The bad news is that if you miss payments, the lender has a right to repossess your home. Only consider taking out a home equity loan if you’re confident in your ability to make every payment in full and on time.

4. Family

If your debt load is relatively low but still weighs on you, you may consider asking family for the funds to pay it off. Then, repay the family member in monthly installments. While it can be tough to ask for help, getting rid of high-interest debt is no easy task. Even if you repay the new loan with interest, as long as it’s a lower interest rate, you’ll be money ahead.

Although it’s easy to get discouraged when you’re in debt, resist that feeling. Millions of people just like you have discovered a method for digging their way out (and lived to tell the story).

The Ascent’s best personal loans for 2022

Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing The Ascent’s best personal loans for 2022.