What is debt consolidation?

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Even if you’re doing your best to manage your money, paying off high-interest debt every month can make it hard to reach your financial goals. It’s a situation faced by millions of Americans as their debt continues to grow.

One way to deal with multiple debt payments is by consolidating debt, whether through a debt consolidation loan, balance transfer credit cards, student loan refinancing, home equity loans or HELOCs. Here’s what you need to know about debt consolidation and which method could work best for you.

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What is debt consolidation?

Debt consolidation is when you merge multiple debts into a single debt. Instead of making separate payments to multiple credit card issuers or lenders each month, you roll them into one payment from a single lender, ideally at a lower interest rate.

While debt consolidation won’t wipe out your debts, the strategy can make it easier and less expensive to pay off debt.

You can use debt consolidation to merge several types of debt, including:

  • Credit cards.
  • Medical debt.
  • Personal loans.
  • Student loans.
  • Auto loans.
  • Payday loans.

How does debt consolidation work?

There are several steps to debt consolidation:

  1. Choose which type of loan you’re going to use to consolidate your debt. Depending on your credit profile and the type of debt or loans you’re consolidating, you might consider a personal loan, a balance transfer credit card or a home equity loan or line of credit.
  2. Shop around with multiple lenders, then apply for the loan or credit card.
  3. If you decide to use a debt consolidation loan, use the proceeds from your new loan to pay off the existing balances on all the debts that you’re consolidating. If you’re using a balance transfer credit card, you will transfer your existing balances onto the single credit card.
  4. Make payments on your new loan. Consider setting up automatic payments on this loan so that you never miss a payment. Direct any extra cash you have to the loan in order to pay it off more quickly.

Ways to consolidate your debt

No matter what type of debt you’re consolidating, you have a few options to choose from.

Debt consolidation loan

Debt consolidation loans are personal loans that consolidate multiple loans under a single loan with a fixed monthly payment. Debt consolidation loans generally have terms between one and 10 years, and many will let you consolidate up to $50,000. They only make sense if your new loan’s interest rate is lower than the interest rates of your previous loans.

Balance transfer credit card

If you have multiple credit card debts, a balance transfer credit card can help you pay down your debt and minimize your interest rate. Like a debt consolidation loan, a balance transfer credit card consolidates multiple streams of high-interest credit card debt onto one credit card with a lower interest rate.

Most balance transfer credit cards offer a 0 percent APR introductory period, typically lasting anywhere from 12 to 21 months. If you can manage to pay off all or most of your debt during the introductory period, you could potentially save thousands of dollars in interest payments. However, if you have a large outstanding balance after the period is over, you may find yourself in more debt down the road, as balance transfer credit cards tend to have higher interest rates than other forms of debt consolidation.

Student loan refinancing

If you have high-interest student loan debt that’s hard to manage, refinancing your student loans could help. Student loan refinancing lets borrowers consolidate both federal and private student loans under one private loan with a single, fixed monthly payment and better terms.

While refinancing can be a great way to consolidate your debt, you need to meet certain eligibility requirements. Also, if you refinance federal student loans, you’ll lose your federal protections and benefits, like income-based repayment and deferment options.

Home equity loan

A home equity loan — also called a second mortgage — allows you to get the funds you need by tapping into your home’s existing equity. Most home equity loans come with repayment periods between five and 30 years, and you can typically borrow up to 85 percent of your home’s value, minus any outstanding mortgage balances.

Home equity loans tend to have lower interest rates than credit cards and personal loans, since they’re secured by your home. The downside is that your home is at risk of foreclosure if you default on your loan.

Home equity line of credit

A home equity line of credit (HELOC) is a home equity loan that acts as a revolving line of credit. Much like a credit card, a HELOC allows you to draw the funds that you need, as you need them, with a variable interest rate. A HELOC also taps into your home’s existing equity, so the amount that you can borrow is dependent on the equity you have in your home and your financial situation.

A HELOC is also a long-term commitment, with the average draw period —  the period of time when you can draw funds — lasting 10 years. The repayment period can last up to 20 years, during which time you can no longer borrow money.

When to consolidate your debt

Debt consolidation can be a useful way to save money and organize your debt payments. Here are a few examples of when consolidating your debt makes sense.

You have many different monthly payments

If you’re struggling to keep track of multiple monthly payments, a debt consolidation loan can help by simplifying multiple payments into one monthly payment.

You have a good credit score

Different lenders have different requirements, but generally, if you have a credit score that’s considered good (670 or higher), you have the potential to snag a lower interest rate with a debt consolidation loan than you’re currently paying. This is especially true if you had poor credit when you took out your original debt.

When not to consolidate your debt

Debt consolidation may not be the best or most efficient method of dealing with debt in all circumstances. Here are a few scenarios where you may want to look at other options.

You’re offered higher interest rates

If the interest rate on your debt consolidation loan is higher than the rates on the loans you’re currently paying off, you may not save money by consolidating your loans. If you’re unable to get a loan at a rate that makes debt consolidation effective, consider other methods of tackling your debt.

You don’t have a budget moving forward

Borrowers who aren’t committed to reducing their debt over the long term also won’t get the full benefits of consolidation. The reason? They may end up incurring new debt on the cards that they’ve just paid off, putting them deeper in debt.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Other ways to get out of debt

If debt consolidation methods don’t suit your financial situation, you still have options. Here are a few ways that can help you get out of debt that don’t involve debt consolidation.

The snowball method

The snowball method involves making the minimum payment on all of your debts, but making the full monthly payments — or even more — on your smallest debt. Once you pay down the smallest debt, you’ll move on to the next smallest, all while still making the minimum payments on your other debts.

The avalanche method

The avalanche method is similar to the snowball method in that minimum monthly payments made on all of your debts each month with the exception of one. Instead of channeling your excess payments into the smallest debt, you’ll focus on the debt with the highest interest rate. Once you pay down the debt with the highest rate, you’ll move on to the next highest, and so on.


A realistic monthly budget helps you keep track of exactly where your money is going. Not only is this a good financial practice in general, but it can show you where you may want to cut back on the spending and reallocate those funds toward your debts.


If you have a high APR on your credit cards, you can always ask your credit card issuer for a lower APR. If you do get approved, you could potentially save hundreds of dollars in interest payments.

Debt settlement

Also known as debt relief or debt adjustment, debt settlement is when you settle your existing debt for less than you currently owe, with the promise that you’ll pay back the settled amount. This is typically done through a third-party company or a lawyer and may come with hefty fees, but it could be a good way to take some of the pressure off of unmanageable debt.

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