Debt Consolidation

Feeling buried by debt? Debt consolidation could help in the right circumstances. Here's all you need to know about consolidating debt.

A Grand Guide

For many of us, keeping track of bills, loans, credit cards, and more can get overwhelming and become an avalanche of debt to manage.

According to the Federal Reserve’s quarterly Household Debt and Credit Report, the total household debt increased by $312 billion from April–June 2022, a 2% rise quarter-over-quarter. The new total debt for all households is $16 trillion.

(To put that in perspective, that’s way more than the total foreign reserves for 23 countries including China, Japan, Switzerland, and more.)

But you don’t need to know all that to understand debt is a major undertaking for Americans today. How are people managing all this debt?

For some, debt consolidation is the answer. 💡 Let’s dive in. 🤿

What we’ll cover:

What is Debt Consolidation

Debt consolidation is the act of merging multiple debts into a single debt. In some cases, debt consolidation makes financial sense - so let’s break it down. 

Pigeon Debt Reminder

Debt consolidation could benefit you if:

  • It could give you a lower interest rate (the consolidated debt interest rate should be lower than the average interest rate of all existing debts combined)
  • It lowers your monthly payments (if you’re in a financial pinch, lower monthly payments could help you tremendously)
  • It lowers your overall amortization (or what you pay on all loans until they’re paid off, including interest and principal costs)
  • You have a high debt-to-income ratio you’re looking to improve
  • You’re looking for a solution that’s better than debt settlement (which can cost more in the long run and hurt your credit)

Three Dots

Types of Debt Consolidation

There are many ways to reduce your debt burden, each with their own advantages and disadvantages.

Personal Loan Consolidation

A new loan, aside from any existing loans, which consolidates various debts into one.

Student Loan Refinance

Combining multiple student loans into one, typically at a lower interest rate.

Credit Card Balance Transfer

The act of consolidating all credit card debt into one balance on a new or existing credit card.

Payday Loan Consolidation

Consolidating various debts into one payday loan; Be extremely cautious if exploring payday loans.

Home Equity Loan | HELOC

Home equity loans or HELOCs, home equity lines of credit, are a debt option that lets you borrow from the value of your home equity which can then be used to pay off existing debts.

Pigeon Divider

Using A Personal Loan To Consolidate Debt

Probably the most common way to consolidate debt, let's dig into why this is a great option for many.

Hold up…you can consolidate debt with more debt? Yes, and here’s how. 👇🏽

If you have multiple high-interest debts, you may want to take out a more favorable personal loan to help you pay off your debts sooner. 

When you take out a personal loan for this purpose, you use the principal (aka the amount of the loan, without fees) to pay off your high-interest debt. Then, you have just one monthly payment that covers all of those debts at a (hopefully) more advantageous interest rate.

This allows you to pay off your debt sooner, reduce your monthly debt payments, and organize your debt in a way that makes it easier for you to manage.

What does this look like in action? Here’s an example:

Kitt is 32 years old and heads a local media company alongside a business partner. She has paid off most of her student loans on time, but still owes $3,000. 🎓 Her student loans carry a 4% interest rate. She also has a credit card balance of $2,000 that’s accruing 19% interest. 

Kitt wants to buy a house, but she would prefer to pay off all of her debt first. She knows she has a great relationship with her business partner, Rachel. Kitt asks Rachel for a $5,000 personal loan to help her pay off her debts in one fell swoop. Rachel agrees with the condition that the loan have a 3% interest rate and a two-year repayment period, a lower rate than her current 4% and 19% interest rates on her outstanding debt. This lowers Kitt’s monthly and total payments, so she agrees. Kitt is able to consolidate her debt with a personal loan and focus on developing her business.

Kitt and Business Partner

Three Dots

When you consolidate debt with a loan, you can apply for the loan through a bank, credit union, or fintech lender, or even borrow from friends or family

When you officially apply for a loan through a bank or credit union, they’ll likely pull your credit to check your creditworthiness. A credit report is more than just a credit score—a report outlines your previous loan payments and helps evaluate your chances for loan approval. To go along with a general credit report, lenders also look at your credit utilization ratio (what proportion of your credit limit you’re using) and other credit profile factors to make decisions about the details of your loan.

What if you have bad credit history? If you don’t have good credit and apply for a personal loan through an institution, you may have trouble receiving a favorable interest rate, especially without a cosigner. Without a low-interest rate, debt consolidation may not make sense. In that case, you can check out a reliable lender or consider a loan from someone you know. 

Even when you borrow money from a friend or loved one, you should create a promissory note (aka a written loan agreement) or contract that explicitly states all loan conditions. Pigeon provides these documents for you to make personal loans between friends and family as comfortable as possible. 🐣 

Overcoming Debt

PRO TIP: You don’t have to accept a loan offer just because a bank or individual offers it to you. Make sure you’re comfortable with all loan conditions before you sign the dotted line to consolidate debt with a personal loan.

Three Dots

Are There Risks Associated With Debt Consolidation?

There are pros and cons to any loan option. Debt consolidation with a personal loan can massively help someone get out of debt. However, this method is not right for everyone. Here are the risks:

Adjustable Interest Rates

If the personal loan or other debt consolidation loan has an adjustable interest rate, you risk paying a high-interest rate at some point in the loan’s lifetime. Avoid this by getting a loan with a fixed rate, which you can lock in at the start.

Long Repayment Term

Your loan repayment period could be long, leading to more money paid in interest over time. Make sure your repayment timeline is manageable but as short as possible to avoid overpaying the cost of the loan.

Extra Fees

Some personal loans may have fees attached to them that make the cost of the loan too high. Review any costs associated with the loan before agreeing to it. Look out for application fees, origination fees, and prepayment penalties that charge you for paying off the loan early.

Necessary Collateral

If the loan is secured (aka backed by a valuable physical asset, like a car or house), you could put these assets at risk. Rather than a mortgage or auto loan, consider unsecured debt alternatives, like an unsecured personal loan that doesn’t tie in your assets.

Credit Score Hit

Debt consolidation can lower your credit score for a period of time. This is because of a potential hard credit pull, but also because you’re taking on new debt. Once you pay off old debts, your credit report will catch up and you may see your score improve. Avoid consolidating debt before taking out a mortgage or other large debt that relies on credit.

Three Dots

What To Know Before Consolidating Debt With A Loan

Before starting any loan application process, there are certain things you should be aware of.

First, take a look at your bank account cash flow - how much money coming in and out of your accounts. 💸 Determine how much you can afford to pay on a personal loan, including any upfront costs and monthly payments. Keep in mind you’ll be using the loan to pay off existing debt, so you may need extra wiggle room. 

Once you apply and receive a loan offer, take a look at the loan contract. Make sure all the terms work in your favor before signing the dotted line. ✒️ Consider the following factors:

  • Repayment terms and personal loan rates the lender offers
  • Interest rate considerations (annual percentage rate, variable or fixed rate, and more)
  • Length of the loan term and any due dates
  • Origination fees
  • Minimum loan amount the lender requires, if applicable
  • Prepayment penalty and late fee stipulations
  • Autopay discounts

Debt Consolidation Calculator

Make sure you know what you're getting yourself into before jumping into debt consolidation. Know your numbers, and get ahead of any potential headaches.

Pigeon Divider

Best Debt Consolidation Loans To Know About

Top loan options for consolidating debt include:


Pigeon enables people to lend or borrow money with someone they know. It works by offering legal documents, automatic reminders, and payment tracking for any loans you make with friends or family. Use your loan to pay off any kind of debt (from medical bills to credit card debt and anywhere in between), with any amount of money you and the lender agree on.

Borrow Money From Friends & Family


SoFi offers credit card consolidation loans “with lower interest and no fees.” Personal loans range from $5,000 to $100,000. At the time of this writing, interest rates range from 7.99–23.43% APR.

Learn More from SoFi

Bank or Local Credit Union

If you have excellent credit (or at least a decent score), you may be able to consolidate debt with a personal loan from a bank or credit union and get some of the lowest rates available to you. People with lower credit scores may have trouble scoring affordable loan conditions, but eligibility requirements vary. However, it can be a straightforward and a trustworthy way to consolidate debt in the right circumstances.


People with lower credit may benefit from Upstart, which offers debt consolidation loans that take other factors besides credit scores into account. Factors like education and employment can get you a good rate with Upstart. Loan amounts range from $1,000–$50,000, and fixed interest rates range from 5.6–35.99%.

Learn More from Upstart


LendingClub is a peer-to-peer lender with debt consolidation options. Loans go up to $40,000. Interest rates vary depending on the borrower and origination fees cost between 2–6% of the loan.

Get Approved from LendingClub


An online lender and subsidiary of Truist Bank, Lightstream offers debt consolidation loans for certain individuals. Rates right now hover around 5.73% with autopay and excellent credit.

Borrow from Lightstream

Federal Student Aid

Federal Student Aid (FSA) offers student loan consolidation options. Borrowers can consolidate many types of student loans into one debt, including Subsidized Federal Stafford Loans, PLUS Loans, Direct Unsubsidized Loans, Parent Loans for Undergraduate Students, and more. According to FSA, “A Direct Consolidation Loan has a fixed interest rate for the life of the loan. The fixed rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of one percent.”

See If You Qualify for Federal Student Aid

Thinking Kid

Three Dots

FAQs About Debt Consolidation

Answers to your most commonly asked questions about debt consolidation.

Are debt consolidation loans hard to get?

With all the options available to borrowers today, debt consolidation loans are no longer hard to get. However, some borrowers have difficulty getting a loan through legacy financial institutions depending on their credit profiles.

Can debt consolidation help or hurt your credit score?

With the right loan terms, debt consolidation can help your credit score in the long run. However, it can temporarily ding your credit score as well. This is because debt consolidation often requires a hard credit pull. Plus, credit bureaus will see you have new debt, which can dock a few points temporarily while you pay off other debt.

How a Personal Loan Could Affect Your Credit Score

When is debt consolidation worth it?

Debt consolidation makes sense when the loan term, interest rate, fees, and other factors make financial sense. With the right considerations and a trustworthy lender, you can escape debt that has been weighing you down. 🏋🏼‍♀️

Can you consolidate debt with a personal loan?

A personal loan is one of the most popular methods for consolidating debt. Other methods include balance transfers on credit cards, home equity loans, and more.

Top Benefits of Obtaining a Personal Loan

How is debt consolidation different from balance transfer credit card options?

People who owe money on multiple credit cards may consider a balance transfer. When you do a credit card balance transfer, you transfer all of your credit card balances onto a single card. Credit card balance transfers vs. personal loans is a popular argument, so make sure you know what is best for you before adding it to your debt management plan. Always be mindful of balance transfer fees.

Balance Transfers vs Personal Loans: Here Is the Difference

Three Dots

Bottom Line

You deserve to get out of debt. In many cases, debt consolidation can help you do that. By merging multiple debts into one consolidated personal loan, you can subtract more from your total balance with each loan payment and get closer to being debt-free.

If you choose to take out a personal loan from a friend or family member, check out Pigeon for resources and features that benefit everyone. 🐣