Bill consolidation: How to do it with a personal loan

Caucasian woman writing notes near laptop while man searches filesImage: Caucasian woman writing notes near laptop while man searches files

In a Nutshell

If you have multiple loans or monthly debt payments, keeping track of your bills can be exhausting. Using a personal loan to consolidate your debts can help simplify things and potentially save you money. The process is simple, but there are a few steps you might want to take to figure out if this a smart financial move for you.
Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

If you have multiple debt payments due every month, it might feel like you’re always paying bills.

That never-ending payment cycle can get stressful. And if those debts come with high interest rates, you might be worried that you’re paying too much. Debt consolidation with a personal loan could help simplify your payments and might even save you money.

Here’s some important information to consider before taking out a bill consolidation loan.

What is a bill consolidation loan?

Bill consolidation — also known as debt or loan consolidation — is the process of rolling your debts into one payment.

If you’re using a bill consolidation loan to consolidate debt, you can use the money from your new personal loan to pay off various debts. This could include credit card debt, medical bills, auto loans or other household debt. You’ll then make one installment loan payment each month to pay off your personal loan.

A debt consolidation loan shouldn’t be confused with debt settlement. Consolidation can help to simplify and potentially reduce your debt payments, but it doesn’t erase your debt.

When would a bill consolidation loan be effective?

There are a number of situations in which getting a bill consolidation personal loan to combine your debts could be a good financial move.

You want one payment

If you have multiple debt payments, consolidation can be a helpful way to combine them so that you only need to make one loan payment each month.

You may also be less likely to miss a bill payment this way, which could help maintain credit.

Remember, though, that if you start charging on your credit cards again or start having other debt payments, you’ll need to pay those along with the loan payment.

You want a lower interest rate

In some cases, you may be able to secure a lower interest rate with a bill consolidation loan, which can save you money. This can be especially helpful with high-interest debt like credit cards or payday loans.

For example, in September 2018 the average national interest rate on a 36-month unsecured fixed-rate personal loan from a bank was just over 10%, according to the National Credit Union Administration. In comparison, the average interest rate on a credit card issued by a bank during the same time period was more than 13%, according to the NCUA data.

Let’s look at an example of how interest can impact how much you pay. Over three years, a borrower would pay about $224 less in interest on a $4,000 debt by taking out a personal loan instead of using a credit card based on those average interest rates.

Personal loanCredit card
Interest rate10.99%13.36%
Monthly payment$129.24$135.47
Length of repayment36 months36 months
Interest paid$652.55$876.94
Total paid$4,652.55$4,876.94

Getting an idea of the average debt consolidation loan rate might help give you some perspective on whether to consider consolidating your bills with a personal loan.

You want lower monthly payments

If you’re having trouble making monthly payments, consolidation may decrease your monthly payment amount. This can happen either because you secure a lower interest rate or because your new loan is for a longer period of time.

A word of caution: If your new loan is for a longer period of time, you could end up paying more in interest overall even though your monthly payments are lower.

Pros and cons of debt consolidation with a personal loan

Steps to consolidate your debt with a personal loan

If you decide that a bill consolidation personal loan is right for your situation, here are some steps to consider.

1.  Record the details: Make a list of all of your debt, including the interest rates and monthly payment amounts.

2. Research lenders: Many lenders offer personal loans. Research a variety of options with banks, credit unions and online lenders. You can also find multiple lenders at once through websites like Credit Karma.

3. Get prequalified: Before you apply for a personal loan, you may want to seek prequalification with multiple lenders. Getting prequalified — which is not a guarantee that you’ll be approved — may help you get an idea about what loan options are available to you.

4. Decide on loan options: Once you investigate loan options, you may have a better idea of whether a personal loan would help you save money. Compare the interest rate and loan-term length on a personal loan with your current debts to see if consolidating would save you money. Remember that prequalification is no guarantee of approval. If you want the loan, you’ll have to apply for it with the lender.

5. Complete the loan application: The lender you select will notify you of any documents you’ll need to provide in order to complete and finalize your loan application.

6. Secure loan funding: If your loan is approved, the lender will send the money directly to you, likely to your bank account.

7. Pay off your debt: Don’t spend the money from this loan on new purchases! Use this money to immediately pay off the debt that you wanted to consolidate.

8. Begin making new debt payments: Now that you’ve used a personal loan to pay off your other debts, you’ll need to make payments on the personal loan until it’s paid off.

Bill consolidation loan alternatives to consider

Using a personal loan for debt consolidation isn’t right for everyone. Personal loans are typically unsecured, meaning they’re not backed by collateral like a house or a car. You’ll likely need good credit and a stable source of income to qualify.

Luckily, consolidating your debt payments with a personal loan isn’t your only option.

You may also want to consider the following:

  • Credit card balance transfers: If you’re considering consolidating credit card debt, you might also consider a credit card balance transfer. Many credit card companies have offers to consolidate debt onto one card. These offers may usually come with 0% or low interest introductory rates for a limited amount of time.
  • Student loan consolidation and refinancing: If the debt you want to consolidate is student loan debt, you may want to consider student loan consolidation or refinancing. If you have federal student loans, there are certain financial protections you could lose if you consolidate the debt with a private lender rather than the federal direct loan consolidation program.
  • Home equity loan or home equity line of credit: If you own a home and have equity in it, you might consider a home equity loan or home equity line of credit. The interest rates on these products may be lower than rates offered for unsecured personal loans, which could save you money. But there is risk involved: If you default on a home equity loan or line of credit, you could lose your home in foreclosure.

Bottom line

Consolidating your debts with a personal loan can be a good financial move in some situations. But you’ll want to take certain steps — like comparing loan options — to help ensure that getting a personal loan is a smart way for you to manage your debt.

About the author: Erica Gellerman is a personal finance writer with an MBA in marketing and strategy from Duke University. She’s also the founder of The Worth Project: a weekly money newsletter you actually want to read. Her work has b… Read more.