Managing your debt can feel intimidating — and if you have high-interest debts, it may also be expensive.

Implementing a debt repayment strategy can help you reorganize and pay down your debts. And if you’re currently struggling to stay on top of multiple debt repayments, or you're hoping to save money on interest, debt consolidation[1] may be a good option for you.

Read on to learn about how debt consolidation works, the many options for debt consolidation you may have available to you, and tips to set yourself up for success.

The Definition of Debt Consolidation

Debt consolidation is a debt management strategy that can help you pay down or eliminate your debts. It involves rolling debt from multiple sources — for example, across multiple credit cards or loans — into a single loan or credit account.

For example, an individual with three outstanding credit card debts — $500, $750, and $1,000 — could consolidate their debt using a single $2,250 loan or line of credit.

Impacts of Debt Consolidation

Debt consolidation has two primary impacts:

  1. Simplifying Debt Repayment
    Consolidating multiple debts into one loan makes it easier to manage your debt. Instead of making multiple monthly payments, you can pay down your debt with a single payment to a single creditor. A streamlined plan may make debt repayment more manageable.
  2. Lowering Interest Rate & Monthly Payments
    You can choose to consolidate higher-interest loans into a lower-interest loan, reducing the amount of interest paid each month. Paying less interest means more of your payment will go to paying the principal — the balance you owe — to help you get out of debt faster. Reductions in your monthly payment could also come from selecting a longer repayment period, however choosing this option may result in paying more in interest over time

How Debt Consolidation May Impact Your Credit Score

Depending on many factors, including the status of your current credit obligations and your payment behavior, debt consolidation may have a third benefit: the opportunity to improve your credit score over time. However, debt consolidation could also adversely affect your credit score, especially in the short term. Ultimately, everyone’s financial situation is different.

Signs It May Be Time to Consolidate Your Debt

Debt consolidation may not be an option for everyone, but these signs indicate it may be the right choice for you.

You’re Juggling Multiple Monthly Payments

Managing multiple loans and other credit accounts can feel challenging: you need to keep track of multiple payments and due dates each month, and may have to make payments to multiple institutions. Debt consolidation merges multiple debts into one loan — and one monthly payment — made to one institution, so you can more easily stay on top of your debt repayment.

You’re Carrying High-Interest Debts

If you've racked up high-interest debts — for example, by covering an emergency expense with your credit card, or opening multiple store credit cards — debt consolidation can help. Consolidating high-interest credit card debts into a lower-interest loan could reduce the amount of interest you pay, which can lower your monthly payment and help you pay down debt faster.

You Have Good Credit

Most of the time, you’ll need strong credit to consolidate your debt. If you have poor or fair credit, you may find it difficult to get approved for a debt consolidation loan or line of credit, or you may get a less favorable interest rate.

Your Spending Is Under Control

Debt consolidation provides an opportunity to pay down your debt, but it doesn’t address the root cause(s) of debt. If your debt is due to a one-off occurrence, or your financial situation has changed since you accumulated your debt, then consolidation may be a good option.

You’re Able to Repay the Amount You Owe

Debt consolidation can make it easier to pay down your debt, but it doesn’t change the amount you owe. If your debt-to-income ratio is too high, you may find it challenging to repay your consolidated debt. In that case, it may be best to speak to a financial professional about an alternate strategy that’s right for you.

Ways to Consolidate Your Debt

There are several options available to help you consolidate your debt. Learn about the unique advantages and considerations of a few of the options to find the one that’s right for you.

Personal Loan

One way to consolidate your debt is by taking out a personal loan, particularly if you have high-interest debts, such as credit card debt.

When using this method, you would take out a personal loan equal to the total amount you owe across your accounts and receive the loan funds in a lump-sum that can be used to pay off the debts to be consolidated. From there, you would pay back the loan making payments for a set period of time — for example, once per month for five years — until the loan is repaid in full. This type of loan is known as an installment loan.

Using a personal loan for debt consolidation may offer some advantages. Consolidating higher-interest debts into a lower-interest loan could allow you to save money on interest, which may help you pay off your debt faster.[1] Personal loans also provide a structured repayment plan that can keep you on track, since you must make scheduled loan payments.

Personal Line of Credit

A personal line of credit (PLOC) can also help you consolidate and pay down your debt. Instead of receiving a lump sum payment, you’ll gain access to a line of credit, with the ability to borrow up to the approved credit limit on the line.

PLOCs offer some advantages for debt consolidation. They’re more flexible than an installment loan, allowing you to borrow, repay, and re-borrow money, paying interest only on the amount you owe, referred to as the outstanding balance.

However, this flexibility has a downside: without the structured repayment that comes with an installment loan, it’s up to you to create and stick to a debt repayment plan since the payment due each month may vary and you have ongoing access to funds. You’ll need to be disciplined in paying down the balance you owe and spend mindfully if you make additional purchases using the credit — otherwise, you may end up carrying the debt longer than you had intended.

Home Equity Line of Credit

A home equity line of credit (HELOC) offers another option for you to pay off your debts by borrowing against the equity in your home. Typically, HELOCs have longer repayment terms, lower rates, and may be more suitable for larger loan amounts.

The lifespan of a HELOC has two phases:

  1. The draw period: During the draw period — usually five to 10 years — the HELOC functions as a revolving line of credit. You’ll gain access to credit you can use to consolidate and pay down your debts. Some HELOCs may allow you to only pay the accrued interest on the amount you owe during this period.
  2. The repayment period: After the draw period, you’ll no longer have access to the line of credit and must repay the outstanding balance via regular payments over a predetermined amount of months — usually, 20 to 30 years (240 to 360 months).

As a borrower, you have the ability to repay your consolidated debt during either phase of the HELOC. Paying down your debt during the draw period offers more flexibility, allowing you to pay the interest and create your own repayment plan for the principal. Once the HELOC enters the repayment period, you’ll make a monthly payment that includes both interest and principal.

While a HELOC offers the advantages of a line of credit, it also involves some risks. If you overspend during the draw period — or you don’t stick to your repayment plan — you may end up with more debt. In addition, if you don’t meet the repayment terms of the HELOC, the bank could foreclose on your home.

Taking out a HELOC may also make you more sensitive to changes in the housing market: If property values decrease, you may end up owing more than your home is worth. This means you would lose money if you sold your home, which would make it more difficult to move.

For this reason, it’s very important that you have a solid grasp on your spending — and the ability and discipline to manage debt repayment — as well as the market conditions in your area, before taking out a HELOC.

Credit Card Balance Transfer

Applying for a credit card with an introductory balance transfer offer or leveraging a promotional balance transfer offer (if available) on a credit card you currently have may be an option if you’re primarily struggling with high-interest debts.

Using a balance transfer can often help you save money. You can choose to transfer the balance of more than one credit card debt to take advantage of lower interest rates and streamline your bills into one payment. You could be eligible for a low- or 0% APR balance transfer on an existing credit card or you could apply for a new credit card that offers a low or 0% intro APR for balance transfers during the first 12-18 months — so you could pay less interest as you repay your debt.

In determining whether a balance transfer will help you save money, be sure to consider any fee that will be assessed to transfer the balance, the current APR on the balance you are planning to transfer and how long you think you'll take to pay the balance you are considering transferring.

Interest will begin to accrue on any unpaid balance after the introductory/promotional period, so be mindful of the introductory/promotional period end date. Additionally, Interest starts to accrue immediately on any purchases you make with your credit card as long as you carry a balance (balance transfers with an intro/promo rate are generally carried from month to month).

Finally, the APR on your credit card will increase after the introductory/promotional period ends. If you don't pay off the full transferred balance before the end of the introductory/promotional period, you may end up paying more interest down the road if the APR is higher than the APR(s) that applied to your original debt.

Learn more about credit card balance transfers.

401(k) Loan

If your employer offers a 401(k) plan, you may have the option to borrow against your retirement savings to consolidate your debt. The concept is simple: you liquidate a portion of the funds in your 401(k) savings account — typically up to $50,000 or 50% of your savings, whichever is less — then repay the loan in regular installments.

One primary advantage of a 401(k) loan is that you’re borrowing your own money, instead of taking on consumer debt. As a result, taking out a 401(k) loan doesn’t require a credit check, so it may be more accessible to those with limited credit history or a lower credit score than some of the other options on this list. It also doesn’t contribute to your debt-to-income ratio, so it won’t influence your ability to apply for a mortgage or other forms of credit down the road.

A 401(k) has other perks for repayment, as well. Regular loan payments come directly off your paycheck, making repayment easy. You’ll also have the opportunity to repay the loan early — an option not always available with consumer loans.

The primary downside of a 401(k) loan is opportunity cost. When you liquidate a portion of your account, you’ll lose out on the returns it could have generated over the lifespan of the loan. Conversely, if you liquidate your assets when the market is down, you may end up selling at a loss. You’ll need to weigh your portfolio performance against the cost of other lending options to decide what makes the most sense for you.

Potential Risks and Considerations for Debt Consolidation

Consider the following three factors to decide if debt consolidation might work for you:

  1. Borrowing Fees
    Several options for debt consolidation involve fees. You’ll generally pay interest on the loan or line of credit, and may have to pay other fees, such as a loan origination fee or an annual fee on a line of credit. Make sure you understand the total cost of your debt consolidation, as well as the amount you’ll need to pay each week or month.
  2. Penalties for Missed Payments
    Taking out a loan or line of credit to consolidate your debt means taking on risk. Missing or late payments can negatively impact your credit score — and if you borrow against the equity in your home or vehicle, you risk losing your asset. Make sure you choose repayment terms that work with your budget and create a plan to ensure you can make your payments on time.
  3. The Possibility of Overspending
    If you have not addressed the root cause that led you into debt in the first place, it may simply create more opportunities to overspend.

Keys to Successful Debt Consolidation

No matter what your financial situation is, building strong financial habits can help you make the most of debt consolidation. Follow these five tips to set yourself up to succeed.

  1. Build — And Stick To — a Budget
    Budgeting forms the foundation for strong financial planning, and it’s a powerful tool to help you repay your debts. It can also help you gain insight into how you currently spend your money, helping you identify opportunities to cut costs to accelerate debt repayment.

    Creating a budget can help you make room for your basic living expenses, debt repayment, and savings, so you know how much “fun money” you can spend each month without derailing your goals. A strong budget can help ensure you always have the money you need to make your debt payments.

  2. Spend With Debit or Cash
    If you shop on credit, consider temporarily switching to cash or debit. Spending on credit can be risky when you’re paying down debt, since you may risk overspending on your new credit accounts — or running up balances on your old ones.

    Use cash or debit for your everyday purchases to avoid accidentally overspending on your credit accounts.

  3. Consider Closing Old Credit Accounts 
    Consolidating your debt can be an opportunity to rethink how you use credit — and close down accounts that no longer serve your needs. Take an honest look at your credit use to determine which accounts still fit into your financial plan and what you can safely trim.

    Keep in mind that the length of your credit history can be a factor in your credit score. For this reason, experts generally recommend keeping your oldest account open, unless doing so would undermine your financial goals.

  4. Prioritize Your Emergency Fund
    When you’re paying off debt, it can be difficult to focus on saving. But establishing or building up your emergency fund can help you live debt-free. A healthy nest egg helps ensure you have cash on hand to cover unexpected expenses, so you can stick to your repayment plan and avoid going further into debt. 

    Ultimately, you should work toward saving at least three to six months’ worth of living expenses — but if that’s not manageable right now, focus on saving what you can. Setting aside $10 or $20 a week in a Money Market or basic savings account adds up over time, and it establishes a habit of saving that you can build on in the future.

  5. Seek Guidance From a Professional
    Choosing a debt management strategy can feel intimidating, and you don’t have to do it alone. A financial professional can help you weigh the pros and cons of debt consolidation and offer advice that’s personalized to your unique financial situation, so you can choose the right option for you. With an objective view, an expert can also help you “think outside the box,” and present solutions you may not have thought of on your own.

    Finally, a financial professional can help you manage your everyday spending to help each dollar work harder for you. By helping you build a sustainable budget that feels rewarding, an advisor can help lay the foundation for you to achieve your financial goals.

Get Help Consolidating Your Debt

Use PNC’s debt consolidation calculator to learn how much you may be able to save by consolidating debt.