How to Use a Personal Loan for Debt Consolidation

Consumers often use personal loans for debt consolidation, which involves getting a loan and using it to pay off existing debt from other sources. The right personal loan can help you simplify your monthly bill paying and may save money in the long run—and that’s exactly why you might choose debt consolidation.

What is debt consolidation?

Debt consolidation is when someone takes out a loan and uses it to pay off other loans—often high-interest debt like credit cards and car loans. You try to find a loan with a lower interest rate than your other debts have. Then, ideally, you can arrange your payments so that you have one bill that's lower each month than the previous combination of debt payments. The lower monthly payment might come simply from the difference in interest rates, or because you opt to stretch out the loan over a longer period.

In doing so, you also make life simpler by paying only one bill a month, reducing the chances of a late or missed payment.

People often use unsecured personal loans, which means no collateral is needed, to consolidate credit card debt. They can also use debt consolidation to combine and pay off other types of debt, such as auto loans and other personal loans.

Are personal loans good for debt consolidation?

Consumers turn to personal loans for debt consolidation more than any other method. The other most common options are balance transfer credit cards, borrowing against home equity, borrowing from a 401(k) account (early withdrawal penalties may apply, check with a professional financial advisor) and debt management plans.

TD Bank personal loans can be used for just about any consumer purpose. To decide whether a personal loan would satisfy your debt consolidation needs, first answer a few questions and do some math.

The most important question is, "Can I avoid taking on new debt until I have paid off the debt consolidation loan?" This is especially important for those consolidating credit card accounts. The balances on those cards piled up for a reason. If you pay them off, will you be tempted to or feel compelled to start using them again? If so, you should first think about creating a budget, reducing your spending, and/or boosting your income.

After you have gotten a handle on your budget and monthly balance sheet, you can start to consider your options for a personal loan for debt consolidation. See TD Bank's Personal Loan rates and terms.

Paying off and consolidating credit card debt

Credit cards tend to have higher interest rates than other types of consumer loans, and you could save money by consolidating them into one personal loan with a lower interest rate. It’s easy for people to accumulate high balances on several credit card accounts. By consolidating credit cards into one monthly payment, you could save money on a monthly basis and reduce overall interest paid. A personal loan also allows you to have a set term that the debt will be paid off vs. only making minimum monthly payments.

The cost of credit card debt

Let’s say that you make monthly payments on three credit cards (A, B, C). The key questions are, "What are you paying now on that $5,000 in credit card debt? How long would it take you to pay off this debt? How much would you pay in interest during that time?"

Initial balance & interest rate

How long to pay off with minimum monthly payments1

How long to pay off with bigger monthly payments2

Card A

$1,200 @ 12%

9.6 years @ $24/month

32 months @ $120/month

Card B

$1,900 @ 13%

14.4 years @ $38/month

37 months @ $190/month

Card C

$1,900 @ 15%

16.8 years @ $38/month

38 months @ $190/month

1By paying only the minimum payments, which add up to $100 a month for all three, you would pay about $9,790 over almost 17 years. You would also shell out $4,790 in interest charges to pay off the original balance of $5,000.

2In this case, you pay $500 a month for about three years. On top of the original $5,000, you pay about $608 in interest charges.

Using a personal loan

Now let’s look at using a personal loan of $5,000 for two years (24 months) to consolidate and pay off that credit card debt. Let’s say that you're approved for a loan with a 10% interest rate. That translates to a monthly installment of $230 and total interest charged of $537 over two years for this loan.

You're paying less in total interest than in that second credit card scenario above, paying off that debt much sooner and paying less every month on the debt—by about $270 a month.

If you decide to pay off that personal loan in three years instead of two, your monthly payments would be about $161 and you'd pay total interest charges of $808. That’s a little more in total interest paid, compared to the second credit card scenario above. However, your monthly payment is $339 lower. Another thing with a personal loan, is that the loan amount, interest rate and term of the loan are fixed. View TD Fit's personal loan rates and term options.

Most credit cards have variable rates, so while you're trying to pay down your balance the rates could rise and worsen your situation. You can also keep using the cards, which increases your total debt.

How do I get approved for a personal loan?

The first step is to try to check out your options. TD Bank can prequalify consumers with a soft credit inquiry that does not affect their credit scores.

There may be several key indicators that help lenders in deciding your creditworthiness, here are just a few

Credit score. Your credit score gives lenders a sense of how likely you are to meet your financial obligations. The lower the score and the lower your creditworthiness, the higher your interest rate is likely to be.

Credit history. This is the record of your financial activity kept by the credit bureaus. It has a big influence on your credit score. Lenders tend to like to see a steady record of payments made on time, and may not like a credit report filled with late payments, bankruptcy, foreclosures or liens.

Income. Personal loan lenders may want proof that you have the means to repay the loan. An important figure here is your debt-to-income ratio. That’s the percentage of your monthly income you use to pay down your debt.

It’s always a good idea to check on these three things before you apply for a loan. That way, you can take steps to improve them and possibly improve your chances of approval or get better terms on the loan.

What to look for when comparing personal loan options

Checking your options will allow you to see what repayment terms you might expect. Consumers need to compare the various parts of the loan.

Make sure to check on those fees with any bank, credit union and online lender you consider. Compare interest rates and the APR, which combines interest rates and fees. Calculate the total cost of a potential loan by adding up the fees, total interest charges and borrowed amount over the time of the loan. View TD Bank's personal loan rates and terms.

Other things to consider:

  • Does the range of maximum and minimum loans suit my needs?
  • How fast will I receive the loan funds? Many lenders can approve a loan and send the money in a day or two

You can find a wide variety of information online. In many cases you can even apply for a personal loan online and have a decision within minutes.


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This article is based on information available in September 2022. It is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.

3Calculations based on calculator: