{"id":3226,"date":"2021-09-01T09:00:00","date_gmt":"2021-09-01T14:00:00","guid":{"rendered":"https:\/\/www.accrediteddebtrelief.com\/blog\/?p=3226"},"modified":"2025-06-02T11:33:12","modified_gmt":"2025-06-02T16:33:12","slug":"what-is-a-debt-consolidation-loan","status":"publish","type":"post","link":"https:\/\/www.accrediteddebtrelief.com\/blog\/what-is-a-debt-consolidation-loan\/","title":{"rendered":"What Is a Debt Consolidation Loan?"},"content":{"rendered":"\n

Debt consolidation is a common method of refinancing that involves paying off high-interest debt with a new lower-interest loan.<\/p>\n\n\n\n\n\n\n\n

The consolidation loan is usually used to pay off multiple unsecured debts like personal loans, medical bills and credit cards. It allows the borrower to focus on making one payment on the new loan, rather than multiple payments.<\/p>\n\n\n\n

Debt Consolidation Loan Example<\/h2>\n\n\n\n

Here is an example of how a debt consolidation loan can combine several lines of credit card debt into one monthly payment.<\/p>\n\n\n\n

Let\u2019s say you have 3 credit cards with a total balance of $15,000 and an average APR of 24%. If interest is compounded monthly you would need to pay $1,005.00 a month for 24 months to bring the principal balance to zero. At the end of the repayment term, the total interest paid would be $9,126.56.<\/p>\n\n\n\n

If this debt was consolidated at a lower interest rate, you could save money on interest and may also have a lower monthly payment.<\/h5>\n\n\n\n
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Consolidation Loan #1<\/strong>: This loan would lower your monthly payment and would save you $3,917 on your total debt paid.<\/p>\n<\/div>\n\n\n\n

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Consolidation Loan #2<\/strong>: This loan would keep your monthly payment the same and would save you $6,032 on your total debt paid.<\/p>\n<\/div>\n<\/div>\n\n\n\n

Details<\/td>Your Combined Credit Card Debt<\/td>Loan #1 (lower monthly payment)<\/td>Loan #2 (same monthly payment)<\/td><\/tr>
Monthly Payment<\/td>$1,005<\/td>$842<\/td>$1,005<\/td><\/tr>
Interest<\/td>24% (average)<\/td>15%<\/td>15%<\/td><\/tr>
Bills Paid<\/td>3 payments<\/td>1 payment<\/td>1 payment<\/td><\/tr>
Terms<\/td>24 months<\/td>24 months<\/td>16 months<\/td><\/tr>
Principal<\/td>$15,000<\/td>$15,000<\/td>$15,000<\/td><\/tr>
Interest Paid<\/td>$9,127<\/td>$5,210<\/td>$3,095<\/td><\/tr>
Total Paid<\/td>$24,127<\/td>$20,210<\/td>$18,095<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Average Interest Rate of a Debt Consolidation Loan<\/h2>\n\n\n\n

A consolidation loan works best when you can get an interest rate that is lower than the interest rate on your existing debt. Keep in mind, when you apply for a loan your interest rate will depend on your credit score.<\/p>\n\n\n\n

The average annual percentage rate (APR) on a debt consolidation loan is around 18%. However, it can range from 4% and 36%<\/a> depending on your creditworthiness.<\/p>\n\n\n\n

By comparison, the average APR on a credit card is 15.38% to 22.53%<\/a>. If you drill down the results to credit cards for bad credit, the average climbs to 24.43%<\/a>.<\/p>\n\n\n\n

In order to determine if a consolidation loan is a good choice for you, you will need to determine what monthly payment you can afford.<\/p>\n\n\n\n

Are Debt Consolidation Loans a Good Idea?<\/h2>\n\n\n\n

Debt Consolidation loans can be a successful strategy when certain criteria are met. These loans should never be used for additional spending and should only be used to pay off existing debt. Consolidating debt is a good idea if you are able to:<\/p>\n\n\n\n