Debt Consolidation Loans: What It Is and How It Works

Key takeaways:

Debt consolidation can be an effective way to increase net worth in a short amount of time.
Debt consolidation loans can offer lower monthly payments, decreased overall payments, or both, depending on the loan term.
When considering debt consolidation, it’s important to know your debt, goal, new interest rate and loan terms, choose the best option, and pay off the previous debts.

Of all the possible ways to increase your net worth in a short amount of time, consolidating your debt is one of the most effective ways.

Have you ever been faced with choosing between sticking to your budget and shelling out for a friend’s birthday party? This is a feeling that many people on a budget tend to experience, and it’s not a pleasant one.

Miscellaneous expenses can add up on top of fixed expenses (think mortgage and/or student loan payments), and sometimes swiping a credit card can feel like the easiest way to bridge the gap in the short run. If you don’t ultimately earn enough to pay your bills, you may find yourself with mounting debt.

That’s where debt consolidation comes in. When you consolidate debt, you can switch out multiple loan payments with one loan on new terms. It can take a matter of minutes to fill out an application; just a small investment of time can save you thousands of dollars over the course of your debt obligation.

Let’s dig a bit further into the details.

How debt consolidation works

A debt consolidation loan effectively replaces your existing debts with a new loan, making the repayment process more convenient by bundling multiple payments into one.

Though loan terms can differ from lender to lender, debt consolidation loans often afford the opportunity to decrease your monthly payment amount, decrease the amount you’ll pay over the life of the loan, or in certain cases, both.

Consult the following decision tree, which outlines these options based on your specific goal:

Debt Consolidation Decision Tree

As you’ll note from the diagram, if lower monthly payments work better for you, you can consolidate with a longer loan term. And if you’d prefer to pay less overall, you can consolidate with a shorter-term loan or one with a lower interest rate.

Debt consolidation: A hypothetical example

Let’s consider a fictional young professional, Chloe. Chloe just started a new marketing job. With a relatively high starting salary, they were surprised when after a couple of months in their new role they found themself getting nervous about when their next paycheck would hit. At their stage of life, with no dependents and few obligations, they felt that they shouldn’t be living paycheck to paycheck.

But in addition to their monthly expenses, they still have some student loans to pay off, as well as a loan to help cover living expenses from their New York City internship last summer.

Chloe has two $10,000 loans: a student loan with a 5% interest rate and a private personal loan with a 15% interest rate. Both have to be paid off in equal monthly payments over the next five years—simply put, Chloe has to pay $425 every month ($188 for the federal loan and $237 for the private personal loan) until their debt is cleared.

Here are Chloe’s loans:

Debt Consolidation Loan Example

Chloe shops around and learns that they can consolidate her loans into a single loan with an 8% interest rate. They then have to make a choice around the loan term.

If they choose to pay their loan back over five years, they cut their monthly bill down to $405/month, and would save a total of $1,265 relative to their initial loan agreements.

If they choose a loan term of ten years , they’ll have a lower monthly payment ($242/month). However, they’ll pay more overall if they choose the longer-term loan. In the ten-year scenario, they have an additional five years of payments to make, and will pay an additional $4,787 in interest relative to the five-year scenario.

Debt Consolidation Loan Comparison

Chloe can now make the choice that’s right for them. Through one consolidated loan, they don’t have to keep track of different payment dates or complicated contract language and can focus on their new job.

This is all to say that debt consolidation loans replace multiple existing loans with a single loan. This can work with a variety of different loans, including unsecured debts like credit cards.

How to take advantage of debt consolidation loans

While debt consolidation loans can give you breathing room, they don’t eliminate your debt. The idea is to try to make that debt more affordable, manageable, and ultimately, cheaper.

You can manage your debt with 5 basic steps:

Step 1: Know your debt

Find the principal balance and the interest rate for each of your debts including credit cards.

Step 2: Know your goal

Determine the goal of your debt consolidation. Do you want to reduce the total sum of payments you make over the loan term, or keep a longer term and pay less every month?

Review the decision tree above to view hypothetical outcomes.

Step 3: Find your new interest rate and loan terms

There are several companies that will help you consolidate your debt, from banks to online lenders. Many companies will give you an interest rate based on your credit score, but some lenders recognize that your credit score alone does not define you.

For example, Upstart’s model looks at your education, employment and several other factors to offer you a personalized rate, even if you don’t have an extensive credit history.

Pro tip: Protect your credit score while comparing options. Some lenders may do a hard credit check during the application, which can negatively impact your credit score. You can explore loan options through Upstart, without any impact to your credit score when you check your rate.

Step 4: Choose the best option for you

As you evaluate different loans, be sure to read the fine print and check for origination fees, interest rate changes, and prepayment penalties. Once you’ve found the debt consolidation loan that works for you and your goals, it’s time to move forward.

Step 5: Pay it off

Once you receive your debt consolidation loan proceeds, it’s up to you to pay off each of your previous debts.

After that, you’ll only be liable for a single monthly payment to your new lender. Set a new payment date and enroll in automatic debit to make the process of paying as simple as possible.

You’re now on your way to financial freedom.

Upstart Network, Inc. (NMLS #936133) is not a lender. All loans on its marketplace are made by regulated financial institutions.

All mortgage lending is conducted by Upstart Mortgage, LLC dba Upstart Home Lending. (NMLS #2443873). Equal Housing Opportunity.

Checking your rate won’t affect your credit score: When you check your rate, we check your credit report. This initial (soft) inquiry will not affect your credit score. If you accept your rate and proceed with your application, we do another (hard) credit inquiry that will impact your credit score. If you take out a loan, repayment information may be reported to the credit bureaus.
Upstart’s model considers education: Neither Upstart nor its lending partners have a minimum educational attainment requirement in order to be eligible for a loan.
41% more approvals and 33% lower rates than a traditional model: As of publication in April 2026, and based on a comparison between the Upstart model and a hypothetical traditional model using Upstart data from Jan – Dec 2025. For more information on the methodology behind this study, please see Upstart’s Annual Access to Credit results here.
Unsecured Loans: While most loans through Upstart are unsecured, certain lenders may place a lien on other accounts you hold with the same institution. There may be an option to secure your personal loan through Upstart with your vehicle, which will require a lien to be placed on the vehicle. It is important to review your promissory note for these details before accepting your loan.
Loan amounts from $1,000 -$75,000: Your loan amount will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will qualify for the full amount. Minimum loan amounts vary by state: GA ($3,100), HI ($1,500), MA ($7,000). Maximum loan amounts may vary by state.
Closing and funding timeline: In April 2026, 10% of funded HELOCs achieved a closing timeline of 2 days or less and a funding timeline of 7 days or less. This timeline assumes consumers close with our remote online notary, provide supporting documentation promptly, and ensure the information provided is accurate and consistent with our verification process. Delays, discrepancies, and other unforeseen factors may impact the closing timeline. MBA’s 2025 Home Lending Study reports an average industry closing time of 37 days.
APRs from 6.2% – 35.99%, with 3 or 5 year terms: The full range of available rates varies by state. The lowest rates are only available to the most qualified applicants. A representative example of payment terms for an unsecured Personal Loan is as follows: a borrower receives a loan of $10,000 for a term of 60 months, with an interest rate of 17.50% and a 7.25% origination fee of $725, for an APR of 21.23%. In this example, the borrower will receive $9275 and will make 60 monthly payments of $252. APR is calculated based on 5-year rates offered in March 2026. There is no downpayment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will be approved.
Instant deposits: To receive instant funding, your bank account must support instant transfers. If your account does not support instant transfers, funds will be available to you depending on your bank’s transaction processing time and policies.
Always On Commitment: We are committed to maintaining your credit limit as long as you continue to meet program eligibility and account requirements. To ensure the safety and security of all our members, we reserve the right to adjust or close lines in specific circumstances, including account default or late payments, suspected fraud, violation of our terms of service (including abusive behavior), or when necessitated by legal or regulatory requirements.
Cash Line draws: You may request a draw at any time. Only one draw may be outstanding at a time; after it is fully repaid, you may request another.
HELOC APRs as low as 6.52%: Terms shown here are subject to change without notice. APRs for initial advances range from 6.52% to 18.00% based on rates offered as of April 2026. The lowest rate is only available to consumers willing to become a member of a credit union and to those who meet a minimum FICO score of 780, CLTV under 70%, and DTI under 45%. Your actual rate will depend on many factors such as your credit history, combined loan-to-value ratio (CLTV), line amount, loan term, lien position, and property state. Origination fee to open an account is between 0% and 4.99% of the approved credit limit. The Annual Percentage Rate (“APR”) is variable and based on the Prime Rate as published in the Wall Street Journal “Money Rates” table plus or minus a margin. Your APR will never be less than 3.99% or greater than 18.00%. Property insurance is required.
No annual fee, prepayment penalty, or fees to redraw: Terms shown here are subject to change without notice. Origination fee to open an account is between 0% and 4.99% of the approved credit limit. The Annual Percentage Rate (“APR”) is variable and based on the Prime Rate as published in the Wall Street Journal “Money Rates” table plus or minus a margin. Your APR will never be less than 3.99% or greater than 18.00%. Property insurance is required.
2,500+ Variables:As of 3/31/2026. “Variables,” often also referred to as “features,” refers to raw variables and combined variables considered in our AI models. A “raw” variable is a non-combined, conceptually distinct unit of data, such as “applicant-reported savings.” A “combined” variable is data that has been transformed, combined, or otherwise engineered from a raw variable or set of raw variables, such as “applicant-reported savings” divided by “loan amount.
Fully automated loans: In Q2 2026. Percentage of Loans Fully Automated, which is defined as the total number of loans in a given period originated end-to-end (from initial rate request to final funding for personal loans and small dollar loans, and from initial rate request to signing of the loan agreement for auto loans) with no human involvement required by the Company divided by the Transaction Volume, Number of Loans in the same period.