What is debt consolidation and how can it help you get out of debt?

By Carolyn Morris | Published on November 21, 2025

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Credit card debt in the U.S. has reached a record high. As of the end of 2024, Americans had a collective 1.7trillionin credit card debt, and the average household owed nearly $8,000. Even more concerning: Of the millions of Americans with credit card debt, around 11% are making only the minimum payment each month.

The issue with that is that if you have a high balance, your minimum payment likely isn’t enough to cover the cost of your interest charges each month. That means your debt can quickly compound—and snowball out of control. The good news? Debt consolidation offers a way to simplify your payments, lower your interest rates, and take back the reins.

So, what is debt consolidation? And how can you tell if it’s the right move for you? Here’s what you need to know.

How does debt consolidation work?

Debt consolidation—sometimes called credit card refinancing—is the practice of combining one or multiple high-interest debts into a single, lower-interest account.

Typically, you take out a new loan with a new lender. You use that loan to pay off all your existing debts. Once you’re done, you’ll be left with only your new loan to pay off. If the new loan has a significantly lower interest rate than your original debts, you could save a lot of money.

Keep in mind that debt consolidation does not change your total principal balance; after you consolidate, you’ll still owe the same amount of money. However, consolidating can help you organize your debt and streamline your repayment process. It can also reduce the total you spend on interest payments over time and make your monthly payments more affordable.

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5 ways to consolidate your debt

There are multiple ways to pull off a debt consolidation. Here are five of the most popular.

Fixed-rate personal loan

Taking out a personal loan is one of the most practical ways to consolidate high-interest debt. That’s because personal loans tend to have higher maximum borrowing amounts and lower interest rates than some other consolidation methods, like credit card balance transfers.

Personal loans are available from most banks, credit unions, and online lenders. They can be used for almost any purpose, but they’re particularly popular for debt consolidation. (For that reason, they’re sometimes advertised as “debt consolidation loans.”) As with other installment loans, you’ll receive a lump sum of cash, which you’ll repay in a series of monthly payments over a set period of time, called a “loan term.” Personal loan terms generally range from two to seven years.

Most personal loans are unsecured loans, which means they aren’t backed by collateral. In other words, there is no asset or property that the lender can reclaim if you’re unable to make your payments. Instead, your annual percentage rate (APR) will be based solely on your credit history. (To get an idea of what rates you might qualify for, check your credit report online.)

Credit card balance transfer

When you perform a balance transfer, you move high-interest debt from your old credit accounts to a new credit account. Typically, folks will transfer any outstanding balances to a new credit card that offers a 0% introductory interest rate, and then try to pay off all their debt within that introductory period. However, when that introductory period ends, subsequent rates can be very high. Before you move forward, make sure you’re confident that you can pay off your total balance within that timeline. Otherwise, you could end up paying a higher interest rate than what you had before.

Home equity loan or home equity line of credit (HELOC)

If you’re a homeowner, you can also borrow against the value of your home. In other words, you can take out a new loan or line of credit using a portion of your home equity as collateral. If you fail to make your payments, though, you could lose your home. That risk should not be taken lightly.

However, if you don’t have good enough credit to qualify for a personal loan, a HELOC or home equity loan could be a good solution for you. Generally, both offer lower interest rates, but a home equity loan will have a fixed rate with a clear payoff date, while a home equity line of credit will act like a variable-rate loan. This means your rate could go up in the future, costing you more than you’d budgeted for.

401(k) loan

If you have a 401(k) or similar workplace retirement plan, you may be able to use it as a source of funding for debt consolidation. According to the IRS, you can borrow up to $50,000, or half the balance in your account, whichever is less. However, not all retirement plans allow loans, so you check with your plan administrator first.

The longest repayment term allowed is five years. Similar to borrowing against your home, borrowing against your retirement fund is a risk. If you aren’t able to make the payments on your 401(k) loan, it will be categorized as an early distribution and taxed accordingly. So, if you have a tenuous financial situation, this might not be the best option.

Peer-to-peer loan

This is the newest option for borrowers looking to consolidate their debt. A peer-to-peer lending company connects folks with debt with folks looking to invest. Many programs offer the debt-holder a fixed rate and payoff timeline and accept a wider range of credit scores than traditional banks do. If you have a lower credit score, however, you’ll likely get stuck with a higher interest rate.

When to consolidate your debt

Debt consolidation can help you organize your debts and get back on track. Here are a few situations in which debt consolidation may make sense:

• You want to reorganize many bills and interest rates into a single, streamlined repayment plan
• You have good credit and meet the eligibility requirements for a low-interest loan
• You’ve done the math and believe you’ll save money by refinancing your debt.
• Getting a lower rate through debt consolidation will help you pay it off faster
• You understand the risks associated with taking on a new loan or line of credit
• You have a clear plan to pay off your current debt, and to avoid accumulating new debt in the future

When not to consolidate your debt

Like everything in finance, there is no “one size fits all” solution to paying down debt. Here are a few situations in which debt consolidation may not be your best option.

• You are a highly organized person, and you’re able to aggressively pay down your debts on your own
• You only have one high-interest debt account, and you believe you might be able to work with your creditor to negotiate that rate lower
• You only have a small amount of debt and you’re on track to paying it off within a year. In this case, your time and energy would be better spent on payoff, rather than researching, applying for, and paying fees on a new loan
• You have poor credit and can’t qualify for a new loan with a lower interest rate than what you’re paying already
• You have student loans or other types of loans that don’t qualify for consolidation.
• You are too far in the hole and won’t be able to afford the payments on any of the above debt consolidation options. If your total debt is more than half your income and paying it off in less than five years isn’t possible, then debt relief might be a better solution

Alternatives to debt consolidation

If you have a ton of debt or don’t qualify for a debt consolidation loan, consider these alternatives.

• Negotiate with your creditors: Call your lender or credit card issuer and candidly explain your financial situation. Most creditors would rather receive some payment than none at all. They may be willing to work with you on a debt settlement plan.
• Declare bankruptcy: In extreme cases, you may be able to have your debts discharged by declaring bankruptcy. You’ll generally need to provide proof of severe financial hardship to qualify.
• Find a credit counselor: Credit counseling nonprofits can connect you with an expert advisor at low or no cost. This person will be able to help you come up with a debt management plan.
• Consolidate or refinance student loans. For student loans, you’ll need to pursue strategies specific to education debt. Consider consolidating your loans through the federal government, or applying for refinancing to reduce your interest rate.