Debt consolidation could be a great way to get out of debt and improve your financial picture, but it is not right for everyone. This guide will help you understand which types of debt can benefit most from debt consolidation and which solution might be right for you. You'll also learn how debt consolidation can impact your credit score.
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
Aylea Wilkins is an editor specializing in student loans. She has previously worked for Bankrate editing content about personal and home equity loans and auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information.
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What is debt consolidation?
It can be difficult to manage debt payments, especially if you have multiple high interest debts. Debt consolidation is the process of combining several debts into one new loan. The goal of debt consolidation is to streamline debt and thereby reduce monthly payments, pay less in interest and pay off your debt more quickly.
You can consolidate several different types of debt, including credit cards, auto debt, medical debt, personal loan debt and student debt. Combining different types of debt into one loan makes it easier to keep up with monthly payments, and it can save you a lot of money. If you want to consolidate your debt, there are four major debt consolidation methods to consider.
Ways to consolidate your debt
There are a variety of ways to consolidate debt and the right method for you depends on your unique financial situation. It is important to understand and compare your options before making a decision.
Balance transfer card
A balance transfer credit card allows you to transfer your existing debt balances with an introductory 0 percent APR.
To figure out if debt consolidation is right for you, add up your outstanding loan amounts, credit card balances and other debts. The calculator below will help you determine how debt consolidation would impact your overall monthly payment, and how much you would save on interest.
Pros and cons of debt consolidation
Before deciding on a lender, make sure that consolidating your debt is the right decision for your situation.
Consolidating your debt can help you qualify for a lower interest rate
Combining multiple payments into one makes it easier to make monthly payments on time
Making on-time debt consolidation loan payments can help you boost your credit score
There are often upfront costs such as loan origination fees, balance transfer fees, closing costs and annual fees
You might not qualify for a lower interest rate
If you miss payments or make them late, you could end up spending more money overall
Types of debt you can consolidate
Consolidating your credit card debt
Credit cards are easier to qualify for than other credit products, but they typically come with higher interest rates. If you are looking to consolidate credit card debt, it is important to find a product with a lower interest rate than the one you’re currently paying. Personal and home equity loans generally have lower interest rates than credit cards. If you choose to refinance with a 0 percent balance credit card, make sure you know how long the interest rate will stay 0 percent and what rate you will qualify for once the introductory rate ends.
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Consolidating your student loan debt
If you have multiple student loans and want to consolidate them, you can either refinance through a private lender or, if you have federal student loans, you can apply for the U.S. Department of Education’s Direct Consolidation Loan. If you apply for the federal loan, you will have more flexible repayment options and access to federal benefits. If you refinance through a private lender, you might be able to secure a lower interest rate.
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Consolidating your medical debt
If you have multiple medical debts, consolidating will give you the convenience of a single monthly payment. If your medical provider doesn't offer a payment plan, or if the monthly payments are too high, a personal loan could be a good option. Personal loans offer lower interest rates than credit cards and could help you avoid bankruptcy due to high medical bills. You could also use a 0% APR credit card if you can pay off your medical debt before the interest rate increases.
Debt consolidation can get you a lower interest rate, helping you pay down debt faster.
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Debt consolidation basics
There are a variety of ways to consolidate debt and the right method for you depends on your unique financial situation. It is important to understand and compare your options before making a decision.
Debt consolidation can cause your credit score to drop initially because it involves taking out a new credit product. If you work with a debt management company, you might see a bigger dip in your credit score since these programs typically require you to default on your loans. However, debt consolidation can help you improve your credit long term since it helps you pay off outstanding debts.
Debt consolidation could help you streamline and keep track of payments, pay off debt more quickly and save money overall. However, it is not right for everyone. Debt consolidation is only worth it if you find a loan product with better terms and interest rates than what you are currently paying. If you are unlikely to qualify for a better interest rate and you do not want to work with a debt management company, debt consolidation might not be right for you.
Those with good to excellent credit are more likely to qualify for the best interest rates on personal loans and balance transfer credit cards. If you have fair to poor credit, there are still bad credit debt consolidation options available, but they are more limited. There are personal loans available for borrowers with bad credit, but they tend to have higher interest rates. If you own your home, you may be eligible for a home equity loan with a reasonable interest rate. If you are drowning in debt and need relief, a debt management company may be able to negotiate your debt with your creditors.
There are several risks associated with debt consolidation, including damage to your credit score, unexpected fees, losing collateral and winding up in more debt than you started with. If you do not find a product with a lower interest rate than you are currently paying, debt consolidation could actually end up costing you more money overall.
The overall cost of debt consolidation depends on the consolidation method you choose, the interest rate you receive and any additional fees charged by the lender. Before signing up for a debt consolidation product, make sure to calculate the monthly interest rate and fees to determine if consolidating will actually save you money.
Debt consolidation can save you money, but only if you are able to secure a lower interest rate than you are currently paying. Before choosing a debt consolidation product and lender, determine what you are currently paying in interest and fees each month and make sure that the product you choose has better rates and fewer fees.
Secured loans are backed by collateral such as a house or a vehicle, and unsecured loans are not backed by collateral. Secured loans are typically easier to get and have lower rates, but you run the risk of losing your collateral if you do not pay back the loan. Compare the differences between secured and unsecured personal loans to see what's right for you.
If you are looking to consolidate a smaller debt that you will be able to pay back fairly quickly, a credit card balance transfer could be the way to go. Credit cards often come with introductory 0 interest periods during which you do not have to pay any interest. If you will be able to pay off your debt during the 0 interest period, a credit card balance transfer could be the cheapest option.
If you need to consolidate a large amount of debt that might take you years to pay off, a debt consolidation loan is likely the best option. Personal loans tend to have lower interest rates than credit cards overall and most personal loans come with fixed interest rates that do not change over the life of the loan.
Using a home equity loan to consolidate debt has benefits and risks. Home equity loans typically have lower interest rates, especially if you have a lot of equity in your home. However, you run the risk of losing your home if you do not pay back the loan.
Working with a debt relief company could be a good option if you have unmanageable debt, are unable to qualify for loan products and want to avoid bankruptcy. Debt relief requires that you default on your debt while the debt management company negotiates with your creditors, which can significantly impact your credit. There is also no guarantee that your creditors will work with a debt relief company. However, working with a debt relief company could help you significantly decrease your debt if you cannot qualify for other consolidation methods, and it is a much better option than bankruptcy.
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