A debt consolidation loan is used to repay existing debts so that you manage a new loan instead. It is different from debt settlement, credit counseling and credit repair. Consolidation changes how debt is financed; it does not erase the amount you owe.

How the borrowing arrangement works

List each current balance, rate, payment and expected payoff date. Then compare those with the new loan's fees and schedule. Check whether the new lender pays creditors directly or whether you must complete the payments yourself.

Costs and repayment

A lower monthly payment can come from a longer term. Calculate the total cost of both paths and include any new origination charge. Make a plan for the credit lines you have paid off so new spending does not rebuild the old balances.

Preparing to compare offers

• Obtain current payoff figures rather than copying only the last statement balance.
• Ask whether the lender pays creditors directly or deposits money for you to distribute.
• Compare total remaining payments under both plans, including the new fees and any change in term.

Questions worth asking

• Will the new loan cover all selected balances?
• What is the total cost after fees?
• Am I turning unsecured debt into secured debt?

Consolidation does not cancel debt

Credit counseling, settlement and consolidation work differently. If the payments are already unmanageable, ask a qualified nonprofit credit counselor about options and fees before committing to another loan.

Will consolidation always save money?

No. Savings depend on rates, fees and the repayment timeline compared with the current debts.

Is consolidation the same as settlement?

No. Settlement involves seeking to resolve a debt for less than the amount owed; consolidation is new borrowing to repay debt.

BorrowCompass provides a guide to this topic at how does a personal debt consolidation loan work. Review current provider terms before making a borrowing decision. BorrowCompass does not issue loans or guarantee approval.