Debt Consolidation can make life easier

If you’re overwhelmed by debt, you’re not alone. There are some excellent choices out there that can help you get your life back on track. Rolling multiple debts into a single monthly payment can save you money and make your debt easier to manage. 

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Glossary Terms

A proceeding in a federal court in which a borrower who owes more than his or her assets, can relieve the debts by transferring his or her assets to a... <a href='/glossary/what-is-bankruptcy' title='See the full definition of Bankruptcy'>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>
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>
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>
What is Debt-to-Income Ratio?
Debt-to-income ratio, also known as DTI, is the relationship between a consumer’s monthly debt payments and income. This may be referred to as DTI,... <a href='/glossary/what-is-debt-to-income-ratio-dti' title='See the full definition of What is Debt-to-Income Ratio?'>read more</a>
Failing to repay a debt as agreed. Defaulting on an obligation can have serious consequences, including but not limited to lawsuits, eviction,... <a href='/glossary/what-is-default' title='See the full definition of Default'>read more</a>
A legal remedy for non-payment of a mortgage debt. The lender takes and sells the property to cover amounts owed. Any remaining proceeds are returned... <a href='/glossary/what-is-foreclosure' title='See the full definition of Foreclosure'>read more</a>
Negative Amortization
Negative amortization occurs when your monthly payments are not large enough to cover all the interest due on the loan. The unpaid interest is added... <a href='/glossary/what-is-negative-amortization' title='See the full definition of Negative Amortization'>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>
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>
Upside-Down Loan
A loan secured by a collateral that has depreciated in market value and is worth less than the balance owed. For example, if you owe $5,000 on a car... <a href='/glossary/what-is-upside-down-loan' title='See the full definition of Upside-Down Loan'>read more</a>

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
Federal loan for homeowners whose mortgage balance exceeds their home's value 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

Can you lower your monthly payments?

When you have many bills to pay, a bill consolidation can really help simplify your monthly expenses. Let's compare your current loan amounts to your potential monthly payments right now with our Debt Consolidation Loan Calculator.

Loans you wish to consolidate:

Loan Balance Monthly Payment
Total: Total:

Consolidation Loan Rate


Loan Term :

Consolidation Loan Amount
New Monthly Payment $0

Your Monthly Savings Would Be:

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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

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.

Frequently Asked Questions

How does debt consolidation lower my monthly payments?

There are two ways to lower your monthly payments. First, if you extend the repayment period, the monthly expense drops. Many debt consolidation loans have longer terms than the accounts they replace -- for example, you might have 20 years to pay off a home equity loan. Stretching out that repayment lowers your monthly payment, as you can see in this example:

The second way of lowering your monthly expense is to secure a consolidation loan with a lower interest rate. Lower interest rates mean lower payments, assuming that you don't accelerate your payoff schedule:

Are there any drawbacks to debt consolidation?

Yes. There are potential problems with debt consolidation, and it's only fair to warn you about them.

Number one, keep in mind that the majority of people who consolidate their debts run them back up again. So if you aren't very sure that you won't leave your credit cards alone and refrain from running up balances, you probably shouldn’t take out a debt consolidation loan.

Second, if you choose to consolidate debt with a home equity loan, understand that you will be replacing unsecured debt (which can be discharged in a bankruptcy) with a loan secured by your home (which means you can lose your home if you don't make your payments).

Third, understand that debt consolidation can cost you money. You might lower your payment by extending the amount of time it takes to pay off your debts, but you could end up paying more interest -- even if the interest rate is lower, taking longer to repay an account can cause more interest to accrue. That's not necessarily bad, if lowering the payment is more important to you than paying less interest -- but you should be aware of what the tradeoffs are.

When is the best time to consolidate my debt?

As soon as possible. The longer you stay with your current high-interest loan, the longer it will take to pay off the principal. This means your overall cost will be higher and you’ll be paying way too much interest.

Do I have to be a homeowner to consolidate my debts?

Nope. There are several ways to consolidate debts. You can take advantage of balance transfer offers from credit card companies. Many of them offer low fixed rates for an introductory period; if you use that time to pay down your debt as much as possible, you can save substantial amounts.
You may qualify for a personal loan. Personal loans, also called signature loans or unsecured loans, can be gotten with fixed interest rates, hopefully lower than what you're currently paying.
Of course, the lowest interest rates usually come with home equity loans because they are secured by a house, which makes them less risky for lenders.

Is debt consolidation the same as debt management or debt settlement?

Absolutely not. With a debt management plan (DMP), you pay a lump sum each month to a counseling service or debt management company and they divide it up and send payments to your creditors. Part of this service usually involves negotiating lower payments, decreased interest rates, or removal of penalties. This may help you pay less to get rid of your debt.
Debt settlement is another matter. Debt settlement companies may take payments from you as well, but they don't forward them to your creditors. Instead, they keep your payments until they have a lump sum that they try to get your creditors to accept as full payment for your debts. It's a pretty risky and expensive strategy, and you'll also owe taxes on any forgiven debt.