Debt Consolidation
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7 Must-Know Debt Consolidation Facts

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Whether you have medical bills or credit card balances, or if you owe money on a personal loan, debt consolidation might help you pay off debt faster — and possibly also save you money. To make it work, you may need to take out a new loan or line of credit to help pay off existing debts, as well as maintain the discipline to avoid piling on even more debt. However, with good credit, you may qualify for better repayment terms, like a lower interest rate.

Here are seven key debt consolidation facts to help you decide if this strategy might work for you.

1. Debt consolidation combines multiple debts, not erases them

Debt consolidation means using a new loan or line of credit or a debt management program to combine and pay off multiple debts at once. In addition to having a single monthly payment to make, you might qualify for a lower interest rate than what you had before.

It’s important to understand that while debt consolidation can make paying down your debts easier and more affordable, it does nothing to reduce the amount you owe. With a debt consolidation loan, for example, you’ll need to make sure you can handle a new monthly payment amount and also potentially commit to months or even years of disciplined payments.

2. You can change your repayment terms

When you take out a debt consolidation loan or line of credit, it’s possible to change your repayment terms to make your debt more manageable or affordable — or both.

Here’s what you might be able to change:

  • Switch to a fixed interest rate. Certain types of debt — like credit cards — typically come with variable interest rates that can fluctuate with time and potentially jack up monthly payments. You may be able to consolidate your variable-rate debt with a fixed-interest, fixed-term debt consolidation loan or a home equity loan, so you’ll know exactly how much you owe every month through repayment.
  • Change your repayment term. By consolidating debt with a new loan or line of credit, you may qualify for either a shorter or longer repayment term. Note that a shorter term may let you pay off debt faster, but your monthly payments will be higher. Meanwhile, with a longer term, you may be able to buy time and scale back monthly payments, but you’ll also owe more interest in the end.

3. A debt consolidation loan is a personal loan

Personal loans are a form of credit that can be used for almost anything, like paying for home improvements, college bills or medical expenses — or consolidating and paying off debt. In fact, the most common reason borrowers take out personal loans is to consolidate debt, according to LendingTree data.

It’s generally easier to qualify for a secured personal loan than an unsecured loan, and a secured loan is also more likely to come with a lower interest rate. However, you’ll need to put up some type of collateral — a car, savings or investment account, for example — and if you fall behind on payments, your lender will have the right to take that asset.

Unsecured loans reduce the risk of losing a valuable asset, but they’re often harder to qualify for unless you’ve got good credit, a steady income and relatively few other debts. Interest rates and fees are generally higher too. If you’re considering this type of loan to consolidate debt, make sure you’ll be able to afford monthly payments and that the loan’s benefits will ultimately outweigh its costs.

Unsecured vs. secured personal loans
What is it Pros Cons
Unsecured personal loan A loan based solely on your creditworthiness
  • No collateral required
  • Strong-credit borrowers get the lowest interest rates
Secured personal loan A loan secured by collateral, such as a car or bank account
  • May let you qualify for a loan with fair or poor credit
  • Potentially lower interest rates
  • Possible loss of collateral if you miss payments

4. A debt consolidation loan isn’t your only consolidation option

Debt consolidation loans are popular for managing debt, but they aren’t the only way to consolidate and pay down balances. Depending on your credit, as well as whether you own a home, some of these consolidation methods might be more cost-effective:

4 other ways to consolidate debt
What it is Pros Cons
Balance transfer credit card Credit card that lets you combine and pay off debt from higher-interest cards
  • An introductory APR that’s reduced or 0%
  • Reduced APRs for a limited time only
  • Balance transfer fees
Debt management program Repayment plan designed with the help of a credit counseling agency
  • Single monthly payment
  • Counselors may also be able to negotiate lower interest rates or help waive fees
  • Might require closing existing credit card accounts and not opening new ones
  • Can take years to complete
Home equity loan Loan based on the equity you have in your home
  • Fixed interest rates
  • Lower rates than for credit cards or personal loans
  • No prepayment penalties
  • Loss of home if loan defaults
  • Potentially higher interest rates than for a first mortgage
  • Closing costs
Home equity line of credit Line of credit based on the equity in your home
  • Access funds as needed
  • Only pay interest only on the funds you’ve used
  • Pay off balances without closing account
  • Loss of home if loan defaults
  • Lowest interest rates go to borrowers with excellent credit
  • Possible balloon payment once draw period ends

Balance transfer credit card

A balance transfer lets you move balances from one or more high-interest credit cards onto a new card that comes with better payment terms, like a lower interest rate. Some balance transfer cards come with introductory 0% APRs that usually could last as long as 18 months, while others might offer you a lower interest rate for three years or more.

By offering a lower initial interest rate — or none at all — a balance transfer card gives you time to chip away at existing card balances without piling on even more interest charges. Instead, any payment you make only goes toward paying back the principal you owe, so you might be able to pay off the debt faster.

Debt management program

A debt management program lets you work with a nonprofit credit counseling agency to set up a payment plan with your creditors. Every month, you’ll be expected to make a lump sum payment to the agency, which, in turn, will disburse it to your creditors. Your counselor may also be able to negotiate lower interest rates, get creditors to reduce (or waive) fees or finance charges and help you set up an effective budget.

By sticking with a debt management program, you might be out of debt within three to five years. Your credit score may start to improve too, once you’re making timely payments and actively paying off what you owe. To find a reputable agency, contact the Financial Counseling Association of America or the National Foundation for Credit Counseling.

Home equity loan

A home equity loan is a lump sum loan secured by your home. It offers homeowners a fixed amount of money at a fixed interest rate, which means monthly payments are easy to predict.

You can use funds as you wish, and that includes consolidating debt. However, because you’re using your home as collateral, it’s important to make payments on time — otherwise, your lender might be able to foreclose on your home.

Home equity line of credit

A home equity line of credit (HELOC) is a revolving line of credit, which means you can tap into a steady source of funds repeatedly during a set draw period, usually 10 years. To access the money, you’ll write a check or use a credit card that’s linked to your account. With a HELOC, you’ll receive a credit limit, but you’ll pay interest only on the amount you actually use. You’ll start repaying what you owe once your draw period is over.

Like home equity loans, HELOCs also use your home as collateral, so keeping up with payments is crucial to avoid a chance you might lose it.

5. Debt consolidation can come with fees

Whether it’s a loan, line of credit or debt management program, expect to pay upfront fees that will raise the overall cost of consolidating your debt. For example, a home equity loan typically comes with closing costs that include application and processing fees, appraisal fees and title insurance. Your closing costs might be 2% to 5% of the loan amount.

Balance transfers usually charge transfer fees. They’re typically 3% to 5% of the amount of each credit card balance that is being transferred to the new balance transfer credit card.

Debt management programs typically charge only nominal fees. By contrast, a personal loan might come with an origination fee (which can also be referred to as a processing fee) that’s 1% to 8% of the loan amount. For that reason, it’s important to shop around and compare quotes from multiple lenders before submitting a loan application. Some lenders, like Lightstream, don’t charge origination fees — but you’ll need good to excellent credit to qualify.

Commons fees for consolidating debt
What is it Charged on Cost
Balance transfer fee Fee for transferring a credit card balance to another card Balance transfer credit cards 3% to 5% of the transferred amount
Origination fee Fee paid to creditor for processing a loan Personal loans 1% to 8% of loan amount
Closing costs Fees include those for loan processing, home appraisals and title insurance Home equity loans and HELOCs 2% to 5% of the loan amount; may be lower for a HELOC

6. Your credit will influence your options for debt consolidation

As with any type of loan, you’ll discover more options for debt consolidation loans if you have good credit or better. Strong credit will also let you qualify for a lower interest rate and potentially fewer fees — or even none at all.

If, however, you have poor to fair credit, you may still be able to qualify for a debt consolidation loan. Note that it will likely come with a higher interest rate, or require you to secure it with some type of collateral.

7. Debt consolidation may not be your best option

It’s admirable to want to pay off debt, but debt consolidation may not be right for everyone. With a small balance, you might be better off setting up a budget and chipping away at the accounts you currently owe. With other types of debt — like an auto or student loan — it might be easier and more affordable to simply refinance.

If you’re determined to cut back debt, consider the following options:

Other debt relief options
What it is Pros Cons
Debt avalanche Debt repayment strategy that targets the highest interest rate first Paying off high-interest debt first might save the most money in the end Takes longer to see noticeable progress
Debt snowball Debt repayment strategy that targets the smallest balance first Offers a chance to make quick progress, helping you stay motivated Higher interest charges than with a debt avalanche
Debt settlement Negotiating with a creditor to lower interest rates or settle for a smaller amount Possibly paying less than what you owe Your credit might take a hit; not all creditors accept settlements
Refinancing Debt relief tool used to change repayment terms on an existing loan Possibly locking in a lower interest rate and smaller monthly payment Usually requires good to excellent credit
Bankruptcy Legal process to either eliminate or repay existing debt May eliminate many debts or set up a formal repayment plan Stays on your credit report for 7 to 10 years; may require an attorney and fees, as well as working through the court system; certain debts may not get dropped

Debt avalanche

Debt avalanche is a popular way to repay debt. With this approach, you continue making minimum payments on every debt you owe, while also putting extra money toward the debt with the highest interest rate. Once you pay off that debt, you roll the extra payment toward the account with the next highest interest rate. A debt avalanche might save you more money overall than a debt snowball.

Debt snowball

Debt snowball is another method for repaying debt. With this strategy, you make a minimum payment on every debt you have, then make an extra payment towards the account with the smallest balance. Once that debt is paid off, you start tackling the account with the next lowest balance. If you’re struggling to pay back what you owe, a debt snowball might provide the thumbs-up you need. However, using this method could result in you paying more, as debt with higher interest may remain unpaid longer.

Debt settlement

It may be possible to reach out to your creditors to try to reduce what you owe in exchange for making a lump sum payment. This approach doesn’t always work, but some creditors might be willing to settle your debt.

Note that it may be possible to work with a creditor on your own, though there is the option to work with a debt settlement company. If you do choose to work with a company, avoid ones that demand high fees, request payment upfront or guarantee results. While working with your creditors, a settlement company may also instruct you to stop paying your bills — that’s likely to put you on the hook for late fees and penalty interest, which could damage your credit. In addition, your creditor isn’t required to work with a settlement company.


By refinancing a loan, you may be able to secure a lower interest rate and, in turn, a lower monthly payment. This is likely to make your debt more manageable. Refinancing is often associated with the mortgage on a home, but it’s also possible to refinance other types of debt, such as student loans.


If your debt is so substantial that you can’t reasonably repay it, filing for bankruptcy may be your best option. With a Chapter 7 bankruptcy, most of your assets (with the possible exception of a home) are sold off to pay creditors and most of your debts are forgiven, save for certain debts like child support and alimony. With a Chapter 13 bankruptcy, you work with a court to set up a repayment plan to pay off most — but possibly not all — your debts.

Bankruptcy should be a last resort after you’ve exhausted all other options. A bankruptcy stays on your credit report for seven to 10 years and will likely make it tougher to qualify for a new form or credit or even land a new job. In the end, you’re more likely to find lasting debt relief with a solid debt consolidation plan that’s combined with serious changes in how you spend and save money.


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