NEW YORK, NY / ACCESS Newswire / September 8, 2025 / Debt consolidation is a financial strategy that involves combining multiple debts into one loan, ideally with a lower interest rate. It can be a good pathway out of debt - as long as you make your loan payments on time and don't accumulate more debt than you can manage before paying off your loan.

On the downside, debt consolidation could also increase the total cost of debt. In this article, we'll explain what that means and when this option might be the right choice for you.

What is a debt consolidation loan?

A debt consolidation loan is usually a personal installment loan taken out to pay off unpaid loans and outstanding credit card balances. This streamlines your debt into one loan with one fixed monthly payment.

According to the United States Federal Reserve, the average annual percentage rate (APR) for credit cards in May 2025 was 21.16%. Personal loan interest rates for borrowers with good credit are typically lower than that. Lower interest rates may help you reduce your monthly financial obligation and relieve some of the stress that comes along with having too much debt.

Monthly cost of debt vs. total cost of debt

Debt consolidation loans may reduce your interest costs, but not always. It's important to distinguish between the monthly cost and total cost of your debt before seeking debt consolidation. A lower interest rate could reduce the monthly cost of debt. That's good for managing a monthly budget, but you could end up making more monthly payments over the life of the loan, increasing the total cost of the debt. If consolidating debt ultimately makes your debt more expensive, you'll need to weigh whether the convenience of lower monthly payments is worth it.

When is debt consolidation a good idea?

Applicants with good or excellent credit scores can typically qualify for lower interest rates, so debt consolidation may be a good idea for these borrowers. But getting a low interest rate on a consolidation loan is not guaranteed. The credit score and credit history of the would-be borrower, along with economic and market conditions, can all affect interest rates.

Debt consolidation may not be a good idea if your credit score is low or you haven't addressed the underlying issues that placed you in debt to begin with. You may need to limit overspending and excessive credit card use, and create a budget that keeps your finances on track. Accumulating new debt while you're still paying off old debt defeats the purpose of debt consolidation.

The bottom line

The primary purpose of a debt consolidation loan is to lower the interest rate on your existing debt and cut down the monthly cost of paying the debt. It's important to review the total cost of the new loan before you borrow to make sure it makes sense for you, as well as change your spending habits to keep from sinking further into debt. With commitment and careful planning, a debt consolidation loan can be a powerful tool for getting your debt under control.

CONTACT:

Sonakshi Murze
Manager
sonakshi.murze@iquanti.com

SOURCE: OneMain Financial