What is debt consolidation?

Debt consolidation involves combining multiple unsecured debts into one bill, which can be helpful if you’re overwhelmed by an assortment of monthly payments. You can consolidate a variety of debts, including credit cards, payday and personal loans, utility bills, and medical expenses.

So instead of having to send a separate payment to each creditor or collector every month, you’d make just one. This can help eliminate missed or late payments and ensure that you’re addressing all your debts.

Debt consolidation loans can be a great option, not only because it streamlines monthly payments, but also because, in many situations, you may get a reduced interest rate and lower total monthly payment.

There are many options to consider when deciding to consolidate your debt, some of which work better in different situations.

A word to the wise, though: Debt consolidation loans aren’t for everyone struggling with debt. Determining which method will benefit you the most will involve some homework and some calculations … or a visit to a debt counselor.

Note: If you have a credit score less than 640, struggling to make monthly debt payments and would like to explore your options to reduce your debt by up to 50%, then please click our option to customize a personal debt relief plan.

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How does debt consolidation work?

Debt consolidation can take many forms, including a personal loan, a balance-transfer credit card, a home equity line of credit (HELOC) and a debt management plan, among others. (We’ll get into the details of those options later on.)

No matter what strategy suits you best, the idea is the same: Lump together all or most of your debts into a single payment as a way to save money, simplify your finances … or both.

For example, if you have multiple high-interest credit card debts and outstanding medical bills, you may want to take out a personal loan to repay those debts. Then you can focus on repaying that personal loan, which requires just one monthly payment and, ideally, has a lower interest rate than what you were paying across multiple debts (it may not have a lower rate, but it’s in your best interest to find the lowest one you can).

The specifics of how debt consolidation works will vary by the type of debt you have and the method you choose.

What debts can I consolidate?

Any type of personal debt can be consolidated. This includes but is not limited to:

  • Credit cards (retail or bank cards)
  • Student loans
  • Unsecured personal loans, including payday loans
  • Business debt
  • Medical bills
  • Holiday debt
  • Utility bills, including cell phone bills
  • Money owed to collection agencies
  • Taxes
  • Court judgments

Debt Consolidation Options For Fair & Poor Credit <640


  • Bankruptcy allows you to discharge many of your debts
  • Stops bill collectors from contacting you due to the automatic stay.
  • Allows for a fresh start


  • Bankruptcy will be on your credit report for 7-10 years
  • Your credit score takes a hit
  • Now all debts are wiped away. Federal and private student loans debt won’t be discarded. Some tax debt may not be eligible to be discharged. Alimony or child support won’t be discharged.
  • Assets will be liquated during a Chapter 7 filing. 3-5-year repayment plan with Chapter 13
  • Filing and attorney fees


  • Reduce outstanding debt balance up to 50%
  • No upfront fees
  • People who complete the program usually pay-off their unsecured debt in 24 to 48 months. Assuming the program gets completed.
  • Better option than filing bankruptcy. You can start rebuilding your credit once you have paid off all your debt.


  • Negative impact to the credit score during the program. However, you can immediately build your credit once you complete the program.
  • For some people, depending on their financial situation, they may have to pay tax on the amount of debt that was reduced


  • Offers one monthly payment to cover all bills
  • Helps you stay organized while making regular, timely payments.
  • Can be used even with bad credit
  • Stop penalties and collections


  • Some creditors do not participate in debt management plans
  • Freezes any account included in the DMP
  • Can’t apply for new credit cards during enrollment

Debt Consolidation Options for Good & Excellent Credit <640


  • Personal loans can be easy and quick to obtain, compared with options like HELOCs or a cash-out refinance.
  • Loan fees are low compared with other options.
  • The fixed loan term and interest rate make payments predictable and force you to stick to a schedule.
  • Terms are short (commonly one to five years), so you get your debt paid off expediently.


  • If you have bad credit, it might be difficult to find a personal loan with a lower interest rate than what you’re managing with existing debts.
  • The fixed monthly payment and loan term offers no flexibility.
  • Because terms are shorter, monthly payments are higher.
  • Because personal loans are unsecured, they have higher interest rates.


  • You can save money on interest.
  • The single bill replaces several monthly payments.
  • The end of the promotional period can be a motivating deadline for getting out of debt.


  • Balance transfer cards have limits, so if your debt exceeds the credit limit you’ve received, you won’t be able to pay off all your credit card debt with a balance transfer.
  • Balance transfers often carry a fee, as well, so do the math to make sure it’s worth it.
  • If you don’t pay off the balance before the end of the promotional period, the remaining balance will be subject to the ongoing APR, which may be very high.
  • You will need excellent credit to qualify for the best balance transfer offers, which may be problematic if you’ve been struggling to keep up with debt up to this point.


  • The loan is secured by collateral (your home) so interest rates are lower.
  • Interest payments may be tax-deductible.
  • The fixed interest rate and repayment term make monthly payments predictable and help you stay on schedule for paying off your debt.
  • You can get a longer term with a home equity loan than you can generally get with a personal loan.



  • Because this loan is secured by your home, if you default, you could lose your home.
  • Losing equity in your home can negatively impact long-term financial plans.
  • Because terms are relatively long with a home equity loan, you may pay more interest overall, even if the rate is lower than what you are currently paying.

Does it make sense to consolidate your debt?

While consolidating debt certainly has merits, it is not the right choice for every individual. Above all, the approach has to match the need and the comfort level of the borrower.

Some people prefer a debt management plan, while others benefit from simplified singular payment of a consolidation loan. It all depends on the person and the type of debt they’ve accrued.

A good rule of thumb is: debt consolidation is not a good option if your debt is more than 50 percent of your income. It is also not a fit if you do not have a consistent source of income that more than covers your monthly payment.

Finally, bad credit can keep you from getting a good interest rate, which negates the main purpose of a debt consolidation loan. But obtaining debt consolidation loans with bad credit is possible if you fall into that category.

Click here to view the best debt consolidation loans for 2018

5 Signs You Should Consider a Debt Consolidation Loan


Your interest rates are through the roof.

Consolidating high-interest debt, such as credit cards and payday loans, with low-interest products like a personal loan or balance transfer card can give you financial relief. If you consolidate your debt, you’ll have just one new loan with a lower interest rate.


Fees are adding up.

Finance charges from credit cards or other debt can accumulate quickly if you have multiple accounts. Consolidating debt may eliminate excess fees, which can help you attack the principal balance faster.


You can only afford minimum payments.

Yes, making the minimum payments will help avoid missed or late payments but it could potentially take you a decade to pay off that balance. Debt consolidation loan terms range from 3-5 years, which allow you to get out of debt much faster.


You have trouble managing debt on your own.

Consolidating with a debt consolidation loan makes managing payments easier. When using a debt consolidation, all debts are paid off with your loan, leaving you with one monthly payment. Eliminating late payments and fees which can be harmful to your credit score.


Collections agencies are calling (or they’re about to be).

Using a consolidation loan to pay off debt with collection agencies can get them off your back. The stakes are even higher when you have unpaid taxes. A consolidation loan can clear out your debt with Uncle Sam to help you avoid tax penalties and other repercussions.

How much can I save with a debt consolidation loan?

By using debt consolidation loans, you can save considerably — sometimes up to 40 percent of the total debt. Click our button below and enter your current debts into our loan calculator to start creating a plan to eliminate your debt.

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