How to (Responsibly) Use a Debt Consolidation Loan to Crush Your Credit Card Debt

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

debt consolidation loan

When I ended up in the hospital two years ago, I worried about getting better, not about medical bills. I had great insurance and thought my stay would be covered.

So when I finally got home, I was shocked to get a bill for over $20,000. The amount I owed was way more than I had in savings, so I ended up paying it with my credit cards. I knew it wasn’t smart, but I was out of options.

If you’re in a similar situation and facing a hefty credit card balance, you might feel like you’ve fallen into quicksand, where no matter how hard you struggle, you keep sinking. Credit cards typically have high interest rates, causing your balance to balloon over time. You could end up paying back thousands of dollars more than you originally borrowed.

One solution that can help you take charge of your credit cards is a debt consolidation loan. If you’re motivated to pay off your debt, these loans can help you save money and eliminate your credit card balance faster.

What is a debt consolidation loan?

In the U.S., the average household has a whopping $6,662 in credit card debt. Although all forms of debt can be costly, credit card debt is especially expensive due to high interest rates.

According to the Federal Reserve, the average credit card interest rate was 13.16% in the fourth quarter of 2017. However, some cards can have interest rates as high as 30.00%.

Thanks to interest charges, it can take years to pay off your debt if you only make the minimum payment. And, you’ll pay back thousands more than you originally charged in the first place.

Debt consolidation loans can be a smart tool to accelerate your debt repayment. A debt consolidation loan, also known as a credit card consolidation loan, is a personal loan issued by a bank or financial institution. The personal loan is equal to the amount of your credit card balance and other forms of debt, such as a car loan.

Debt consolidation loans are installment loans, which means you’ll have a set number of payments and an exact payoff date you can circle on the calendar. Even better, debt consolidation loan interest rates tend to be lower than credit cards. Depending on your credit history, income, and amount of debt, you could qualify for a credit card consolidation loan with an interest rate as low as 4.98%.

Using a credit card debt consolidation calculator

In my situation, my credit cards had an interest rate of 15.00%. With a $20,000 balance and a monthly payment of $350, it would’ve taken me over eight years to pay off my cards. With interest charges, I would’ve paid my credit card companies over $35,000.

I decided that a debt consolidation loan was right for me and shopped around with different lenders. I ended up getting a personal loan from SoFi. Although I didn’t qualify for its lowest available rates, I did get approved for a loan at 8.00%, a significant improvement over my credit cards.

With my new loan, I’ll be debt-free in five years. And, I’ll pay back just $24,332 at the end of it, saving me over $10,000.

Credit Cards Debt Consolidation
Loan
Amount $20,000 $20,000
Interest Rate 15.00% 8.00%
Repayment Term 8 Years 5 Years
Monthly Payment $350 $406
Total Interest Charges $15,000 $4,332
Total Repaid $35,000 $24,332

If you’re thinking about consolidating your debt, you can use the unsecured debt consolidation loan calculator to see how much you’d save by consolidating your debt versus making payments on your credit cards. It’ll also show you how much sooner you’ll become debt-free.

Credit Card Consolidation Calculator

Balance

Rate

Term

Monthly

Interest

Balance

Savings

BeforeAfter
Balance
Rate
Term
Monthly
Interest
Balance
Savings
By consolidating your credit cards with a total balance of at a weighted average interest rate of with a new loan at a interest rate, your new monthly payment would be . Your lifetime savings with your new loan would be compared to the total balance you’d pay on your credit cards.

Consolidate and pay off debt with personal loan rates as low as
% APR.

Total

Monthly

Interest

Before

After

$0

What to know before applying for a debt consolidation loan

Although debt consolidation loans can be useful, they’re not for everyone. They’re a tool you can use to better manage your debt, but they’re not a miracle cure. There are a few disadvantages to debt consolidation you should consider before applying for a loan:

  1. They don’t address the root cause: A debt consolidation loan doesn’t eliminate your credit card balance; it just moves your credit cards to a new type of debt.
  2. You may need a cosigner: If your credit is less than stellar, you might not qualify for a low interest rate, or you might not get approved at all. In that case, you might need a cosigner, a friend or relative with excellent credit who acts as a guarantor on the loan, before a lender will approve you.
  3. Your payments could be unaffordable: If you racked up a lot of debt, switching to an installment loan with a shorter repayment period could increase your payments. For example, my payments would’ve jumped to $905 if I opted for a two-year loan instead of a five-year one. Make sure the repayment term you choose is realistic for your budget.

Before applying for a loan, identify how you racked up a credit card balance in the first place and develop a strategy for paying off the loan if you’re approved. You might have to make some drastic changes to your lifestyle, such as launching a side hustle or getting a roommate, to make credit card consolidation effective for you.

Managing your debt

If you’ve done your homework and understand the benefits and drawbacks of a debt consolidation loan, it’s wise to shop around and get offers from multiple lenders to find the best deal. You can compare rates from multiple lenders at once without affecting your credit score.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.365% APR to 13.365% APR (with AutoPay). SoFi rate ranges are current as of April 11, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.365% APR assumes current 1-month LIBOR rate of 1.88% plus 3.735% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 4.99% – 16.24% (4.99% – 16.24% APR) based on applicable terms. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
5.37% - 14.24%1$5,000 - $100,000
Check rate nowon SLH's secure site
8.00% - 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.