Debt Consolidation can make life easier

Do you feel like your life is on hold because you’re trapped by all your debt payments? If so, you’re not alone. Consolidating your debt could be the answer you’re looking for. It can help lower your monthly payments and get you out of debt faster so you can get back in the driver’s seat of your finances. With so many ways to consolidate, there’s bound to be a solution for your unique situation.

What is debt consolidation?

Debt consolidation is the process of combining your debts into one loan with a lower interest rate. Instead of having multiple debt payments each month, you’ll only have one. This simplifies your bill-paying process each month plus reduces the total amount you owe to your creditors.

Glossary Terms

Debt Consolidation
Debt consolidation is a process by which several debts are replaced by one debt. The idea is to simplify repayment and hopefully make it more... <a href='/glossary/what-is-debt-consolidation' title='See the full definition of Debt Consolidation'>read more</a>
Consolidating Debt
Replacing several debts or loans by transferring the balances to a single loan or line of credit, usually at a better rate. (Debt consolidation loans... <a href='/glossary/what-is-consolidating-debt' title='See the full definition of Consolidating Debt'>read more</a>
What is Debt?
Money that is owed to an individual or institution. Credit card balances, mortgages, auto loans and personal loans are all examples of debt. <a href='/glossary/what-is-debt' title='See the full definition of What is Debt?'>read more</a>
Revolving Debt
Open-ended accounts, usually with variable interest rates, pre-determined credit limits and payments that are calculated as a percentage of the unpaid... <a href='/glossary/what-is-revolving-debt' title='See the full definition of Revolving Debt'>read more</a>
What is a Debt Consolidation Loan?
A single loan that replaces several other loans, making it easier to manage the debt. The new loan should have more favorable terms than the accounts... <a href='/glossary/what-is-debt-consolidation-loan' title='See the full definition of What is a Debt Consolidation Loan?'>read more</a>
Secured Debt
A secured debt is money borrowed that is guaranteed (or secured) by the borrower’s funds or assets and held by the lender in an interest-bearing... <a href='/glossary/what-is-secured-debt' title='See the full definition of Secured Debt'>read more</a>
Unsecured Debt
Unsecured debt is debt without collateral to back the loan in case of default. <a href='/glossary/what-is-unsecured-debt' title='See the full definition of Unsecured Debt'>read more</a>

Is debt consolidation right for you?

The great thing about debt consolidation is that it can allow you to get debt-free quickly. But the only way it really works is if you’re disciplined about sticking to the debt repayment program and not running your credit cards back up. Experts estimate that this happens to between 50 and 85 percent of people who try debt consolidation.

Here are some things to keep in mind:

  • Balance Transfer
  • Cash-out Refinancing
  • Home Equity Loans
  • Personal Loans
  • Student Loan Consolidation

Pros of Balance Transfers

  • The interest rate can be very low. Average introductory rate for balance transfer cards is about 2.5 percent.

  • Only one account to keep track of.

  • Application and approval is quick and painless.

  • Upfront fees are low.

Cons of Balance Transfers

  • You may not qualify for the advertised intro rate if your credit scores are not excellent.

  • There is typically a balance transfer fee.

  • The interest rate can spike if you're 60 days late on your payment. That rate could be much higher than the rates of the accounts you paid off.

  • The introductory rate is good for a limited time, then increases.

Pros of Cash-out Refinance

  • Because the loan is secured by your home, the interest rate is much lower than that of debt like credit card balances.

  • The interest may be tax deductible (check with a tax pro).

  • You can lower your monthly payment significantly, because home mortgages can have much longer terms. Stretching out your credit card debt with a ten- to thirty-year loan really lowers drops your payment.

  • You can get a better rate than that of your old mortgage.

Cons of Cash-out Refinance

  • The loan is secured by your home, so if you can't make the payment, you could end up in foreclosure.

  • Credit card debt can be discharged in a bankruptcy because it's unsecured. Once that debt is secured by a home, you can't discharge it with a Chapter 7 filing.

  • Cash-out refinances take time. There's an application, an appraisal, a title search, etc.

  • Cash-out refinancing has higher upfront costs than any other strategy. It's a good solution only if the new loan has better terms than the mortgage it replaces.

  • Stretching out your repayment can increase your total interest expense, even if the interest rate is lower. This can be prevented by making extra principal payments to lower your balance.

Pros of Home Equity Loans

  • Because the loan is secured by your property, the interest rate is lower.

  • The interest is most likely tax deductible.

  • Replacing multiple accounts with variable rates, like credit cards, with a single fixed rate loan makes managing debt easier.

  • Home equity loans have much lower costs than cash-out refinances and can be processed much more quickly.

  • Stretching out your debt repayment over more years can substantially lower your payment.

Cons of Home Equity Loans

  • If you’re unable to make the payment, you could end up in foreclosure.

  • Debt moved from unsecured accounts to a mortgage (which is what home equity debt is) can no longer be discharged in bankruptcy. If your finances are shaky, a mortgage is probably not your safest choice.

  • Stretching out your debt over a longer timeframe may increase the total interest cost, even if the interest rate is lower. This can be avoided by accelerating your repayment with extra principal payments.

Pros of Personal Loans

  • Personal loans almost always have fixed interest rates, making budgeting easier.

  • Application and processing are very fast. You can often get a personal loan in one day.

  • Personal loan fees are much lower than those of home equity loans or cash-out refinances.

  • Terms range from one to five years, so you become debt-free faster.

  • Personal loans can be discharged in a bankruptcy.

Cons of Personal Loans

  • Personal loans are unsecured, so their interest rates are higher than those of home equity loans or cash-out refinances.

  • Because terms are shorter, payments are higher.

  • If your credit isn't very good, you may not be able to get a lower rate than you're currently paying on your credit cards.

Pros of Student Loan Consolidation

  • Borrowers can lock in a lower interest rate.

  • Make just one student loan payment each month rather than multiple.

  • Pay less in interest overall, assuming a lower rate and lower term.

  • More flexible terms means borrowers can extend their terms for a smaller monthly payment.

  • Lock in a low, fixed interest rate.

Cons of Student Loan Consolidation

  • Students who consolidate may no longer qualify for federal loan forgiveness programs.

  • The term may be longer, making the total amount in interest paid higher.

  • Borrowers with poor credit could get a worse interest rate than they have now.

  • Switching from a fixed to a variable rate could mean you pay more down the line if interest rates go up.

Types of debt consolidation loans

There are several options available to you. Depending on your income and your overall debt situation, some options may be more appropriate than overs. If you own a home, for example, a cash out refi or a home equity loan might be ideal for you. On the other hand, if you have high credit card debt with a high interest rate, you might want to explore a credit card balance transfer or a personal loan.

Home Equity Loans
Home equity loans are sometimes called a second mortgage or borrowing against your home. Is this for me?
Home Equity Loans
Can be used to make home improvements and more
You must have good credit and enough equity built into your home
Learn More
Cash-out Refinancing
A cash-out refinance lets you refinance your mortgage for more than you currently owe, then pocket the difference. Is this for me?
Cash-out Refinancing
Typically, interest rates are lower than a home equity loan
Is available on both a fixed rate and an adjustable rate mortgage (ARM)
Learn More
Credit Card Balance Transfer
A credit card offer that features a low- or no-interest introductory period on debt transferred from another credit card. Is this for me?
Credit Card Balance Transfer
With stellar credit, it can be a great way to pay down a large credit card debt
If the fees are too high or your credit isn’t good enough, it may not be the best move
Learn More
Personal Loans
Use a personal loan to consolidate your debt into one monthly payment with a low interest rate. Is this for me?
Personal Loans
Can be used for almost anything
Interest rates are higher because there is more risk for the lender
Learn More