Background

Personal loans became a common tool for debt consolidation as online lenders expanded access in the 2010s. Today they remain popular because they offer fixed monthly payments and—when rates are lower—predictable payoff schedules. In my practice advising people with high-interest credit card debt, I’ve seen both clear wins and avoidable mistakes when borrowers treat a personal loan as a quick fix rather than part of a plan.

How consolidation with a personal loan works

  1. You apply for an unsecured installment loan sized to pay off existing balances (credit cards, medical bills, small loans).
  2. Lender issues funds and you pay off the old accounts; you now owe one lender on a fixed schedule.
  3. Benefits often include a lower rate, a set payoff date, and simpler bookkeeping. Risks come from fees, term length, and behavior changes after consolidation.

(For step-by-step savings math, see our guide on calculating real savings: “Debt Consolidation Personal Loans: How to Calculate the Real Savings”.)

Hidden traps to watch for

  • Origination and processing fees: Many lenders charge 1–8% of the loan. That fee reduces your effective rate and increases upfront cost (CFPB: https://www.consumerfinance.gov/).
  • Longer terms that raise total interest: Lower monthly payments can extend repayment from 2–5+ years, meaning you may pay more interest overall even if the rate is lower.
  • Re-borrowing on cleared credit cards: If you leave credit lines open and start charging again, you can end up with both the loan and fresh credit-card balances.
  • Variable vs. fixed comparisons: Some lenders advertise low introductory or variable options; make sure the rate you accept is fixed or you understand future increases.
  • Credit-score effects: Opening a loan triggers a hard credit inquiry and adds a new installment account. That can lower your score temporarily; payoff can later help credit mix and payment history (see: “How Debt Consolidation Affects Your Credit Score Short-Term”).
  • Missing protections and refunds: Unlike certain federal programs, personal loans don’t include borrower protections for job loss or disability unless you buy additional insurance.

Real-world examples

  • Case A: A client consolidated $30,000 in credit-card debt to a 5% personal loan from 20% cards. Monthly payment dropped and they paid off debt in three years — a clear win.
  • Case B: Another client consolidated but then used cards for new purchases and extended the term to six years. Lower monthly payments masked rising total interest and delayed financial recovery.

Who is a good candidate

  • You have high-rate unsecured debt (credit cards) and enough income to cover a fixed monthly payment.
  • You can commit to keeping paid-off credit lines closed or strictly off-limits.
  • You have a debt plan to avoid future borrowing. If your debt is largely student loans, mortgage-related, or has state-specific protections, a different strategy may be better.

Practical strategies to avoid traps

Common mistakes

  • Focusing only on monthly payment, not total interest paid.
  • Taking a longer-term loan to lower payments without a payoff plan.
  • Treating consolidation as permission to spend more on cards.

Quick checklist before you sign

  • Confirm the APR is the true APR including fees.
  • Run the numbers for total cost and time to payoff.
  • Decide what you’ll do with closed or paid-off cards.
  • Check lender reviews and complaint history (CFPB complaint database).

FAQs

Q: Can I get a personal loan with bad credit?
A: Yes, but expect higher APRs or specialty lenders; consider credit-builder steps before consolidating (CFPB: https://www.consumerfinance.gov/).

Q: Are personal loans tax-deductible?
A: Generally no. Interest on personal loans used for consumer debt isn’t tax-deductible. Consult a tax professional for edge cases (IRS: https://www.irs.gov/).

Q: What happens if I can’t make a payment?
A: Contact the lender immediately to discuss hardship options. Missed payments damage credit and can lead to collections.

Internal resources

Professional note

In my 15+ years working with clients, the most successful consolidations pair a low-rate loan with behavior change: closed or frozen cards, a written budget, and a clear target payoff date.

Disclaimer

This article is educational and not personalized financial advice. For guidance tailored to your situation, consult a certified financial planner or tax professional.

Authoritative sources

(Information current as of 2025.)