Most people get personal loans for debt consolidation — here's the average amount (2024)

Studies reveal that debt consolidation is the top reason why people take out personal loans.

Online lending marketplaceLendingTreereported that 54% of its users seek personal loans to pay down debt, including close to 41% for debt consolidation and around 14% for refinancing credit card debt. According to a September 2023 study by Forbes Advisor, 47% of debt consolidators borrowed between $10,000 and $20,000.

Below, CNBC Select explains the difference between debt consolidation and credit card refinancing, how eachworks and how a personal loan could save you money.

The two biggest reasons people get personal loans are to consolidate debt and/or to refinance the APR on high-interest debt.

Debt consolidation is when you have multiple credit cards and want to streamline your payments into one monthly bill. You can take out a personal loan large enough to pay off all of the accounts, then pay back the lender over months until the loan is repaid.Theaverage American has four credit cards, and it can be overwhelming to track multiple due dates and APRs. If keeping track of your payments is starting to feel like too much, debt consolidation is one way to simplify things.

Credit card refinancing is helpful when you have high-interest debt on one or more cards and you want to save money by lowering your APR. It's a good idea to consider refinancing your credit card debt if you know you need more time to pay off your balance, but your interest rates are so high that you feel you can't get ahead.

While these two purposes are distinct, a personal loan can help you do both: simplify payments and save on interest.Whether from an online lender or a brick-and-mortar bank, personal loans tend to offer lower interest rates than credit cards — but not always— so it's important to understand the terms of a loan before you sign up for it.

Using a personal loan to consolidate debt and/or refinance your credit card APR is similar to using abalance transfer card with a 0% APR period, but they work a little differently.

When you take out a personal loan, the cashis usually delivered directly to your checking account for you to use to pay your creditors. Then, you repay the loan company in monthly installments, typically at a fixed interest rate. Personal loan lenders may charge a sign-up, or origination, fee, but most don't charge any fees other than interest.

Balance transfer credit cards are an alternative to personal loans, if you can qualify for one that will benefit you. They offer a period — anywhere between 6 and 21 months — where you can pay off your debt with 0% interest. They typically come with fees between 2% and 5%, unless you qualify for a no-fee balance transfer card. When you open a new balance transfer card, you request your old credit card balance to be transferred electronically to the new card, which you should aim to pay off within the introductory 0% interest period.

For example, the Wells Fargo Active Cash® Card allows you to transfer debt from an existing credit card, but charges a fee that equals 3% of your balance for 120 days from account opening, then up to 5% ($5 minimum).

Consumer credit card interest rates average about 22.75% according to theFed'smost recent data from February 2024. On the other hand, the average APR for 24-month personal loans is 12.35%.

If you hypothetically had $10,000 worth of credit card debt with a 22% APR, you would pay a total of $3,748.56 in interest, to pay it off over three years (according to Experian's APR calculator). But if you took out a personal loan with a 12% APR, you would only pay $1,957.15 in interest.

In the above scenario, you could benefit from a potential savings of $1,749.41. As you can see, incorporating debt consolidation into your debt payoff plan can save you money in the long run, as long as you understand the terms of the loan.

When choosing the right personal loan for debt consolidation, it's a good idea to gather multiple offers to compare the terms. Often, lenders allow you to get estimated loan terms without a hard credit check, which can be an excellent tool for comparison shopping.

Make sure to pay attention to credit requirements. For instance, for those with strong credit, LightStream can be a solid choice of lender. With competitive rates and high loan amounts available, you can easily tackle your debt if you stay disciplined. Plus, the lender offers a Rate Beat Program which ensures you receive the lowest rate when shopping around for a loan.

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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every loan guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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