How to Use a Personal Loan for Debt Consolidation

Learn when personal loans make sense for debt consolidation and how to execute the strategy without making things worse.

1. Calculate your current weighted average interest rate. List all your debts with balances and interest rates. Multiply each balance by its rate, add those products together, then divide by your total debt. This gives you the baseline rate your consolidation loan needs to beat to save money.
2. Check your credit score and shop for rates. Personal loan rates typically range from 6% to 36% based on creditworthiness. Get pre-qualified with multiple lenders to compare offers without hard credit pulls. Focus on the APR, not just the interest rate, since it includes fees.
3. Run the numbers on total cost and monthly payment. Calculate the total interest you'll pay over the loan term versus your current debt timeline. A longer loan term might lower your monthly payment but could cost more overall. Make sure the new payment fits comfortably in your budget.
4. Apply for the loan and pay off debts immediately. Once approved, use the loan proceeds to pay off your target debts in full within days. Don't let the money sit in your account or use it for anything else. Confirm each debt is marked as paid in full.
5. Close or secure the paid-off credit accounts. Either close the credit cards you paid off or remove them from your wallet and set up account alerts. The biggest risk with debt consolidation is running up new balances while still having the loan payment.
6. Set up automatic payments and track progress. Automate your loan payment to avoid late fees and ensure steady progress. Track your single payment instead of juggling multiple due dates. Consider paying extra toward principal if your budget allows.