What Is Debt Consolidation?
Combining multiple debts into a single new loan, ideally at a lower interest rate to simplify repayment.
Definition
Debt consolidation rolls several separate debts (credit cards, medical bills, personal loans) into one loan with a single monthly payment. The goal is a lower blended interest rate, a fixed payoff date, and simpler bookkeeping. Common methods include personal installment loans, balance transfer credit cards, HELOCs, and cash-out refinances. The strategy works best when the new rate is meaningfully lower than the weighted average rate of the existing debts, and when you commit to not running up the cleared balances again. Running up old card balances after consolidating is the most common way the strategy backfires, leaving you with both the consolidation loan and new credit card debt.
Example
Three credit cards with balances totaling $18,000 at average 22% APR consolidated into a personal loan at 11% APR over 48 months cuts monthly interest by roughly $175 and saves $8,400 in total interest.