Debt Consolidation

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Are you struggling to manage your debt? If you are feeling overwhelmed by the burden of your debt and unable to make on time and consistent payments, you might want to consider consolidating your debt. 

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What is debt consolidation?

Debt consolidation is a debt management strategy that involves rolling one or multiple unsecured debts into another form of financing. Put simply: You take out a new loan or credit card and use it to pay off existing debts with better terms.

Borrowers may consolidate debt for the following reasons:

  • Lower APR
  • Fewer bills to track
  • Faster debt repayment

The reasoning for debt consolidation is simple: The more debts you have, the more difficult it may be to stay on top of your finances. With so many bills to track, it’s easy for something to fall through the cracks — and, thus, hurt your credit score. Consolidating debt helps you keep track of what you owe while granting the potential for lower interest rates than what you currently pay.

How debt consolidation works

Although there are many ways to consolidate debt, it generally works the same way: You pay off one or more debts with another form of debt.

From there, the similarities between the different methods of consolidating debt tend to vary widely. Depending on your unique situation — how much debt you have to consolidate, your credit score, how soon you need the funds, what type of debt you have, etc. — one method may work better for you than another.

Here’s a look at 4 different ways to deal with your debt: Balance transfers, personal loans, home equity loans and debt management plans.

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When is debt consolidation a good or bad idea?

There’s no one-size-fits-all debt management strategy. To determine if debt consolidation is the right move, you’ll need to take a close look at your finances.

Debt consolidation is a good idea when…

  • You have good credit and a favorable debt-to-income ratio
  • You can lower interest rates with debt consolidation
  • You can afford your new monthly payments

Debt consolidation is a bad idea when…

  • You have poor credit or a high debt-to-income ratio
  • You have a small balance that you can pay off in less than a year
  • You owe too much to manage and repay

Where people have the most debt

3 Major Benefits of Consolidation

Less stress with one monthly payment

Once you consolidate your debts, regardless of which method you use, you will have one bill to pay. Staying on top of one bill may be less stressful than having multiple bills and debts seemingly chasing you for a payment each month. With installment loans like a personal loan or home equity loan, your interest rate and term are fixed and your payment is the same each month, so the bill is predictable and may be easier to budget to afford.

Save money in the long run

Ideally, you will use a financial product with a lower interest rate to pay off debts charging a higher rate. The reduction in interest will help you save money you would have been required to pay had you not consolidated your debts. It also saves money on late fees, missed payment penalties and other consequences you may face when you have a difficult time managing debt. Depending on the size of your debt and the difference between the two interest rates, your savings may be worth thousands of dollars.

Build your credit score

If you use financing to pay off debts in collections or the balances on your credit cards, you may notice an immediate boost to your credit score. If you use a balance transfer credit card, opening a new card will increase your overall credit limit, reducing your credit utilization ratio — the total amount of credit available to you that you are using up on your credit cards.

Credit utilization accounts for about 30% of your credit score. A healthy utilization ratio hovers between 10% and 30% of your total credit limit. Personal loans and home equity loans don’t have much, if any, impact on your utilization ratio. If you use either of those vehicles to consolidate credit card debt and avoid racking up more credit debt, you may initially see your credit score spike after paying off your credit cards.

The months and years that follow can make the larger difference to your credit score, but only if you don’t rack up more debt as you pay off the consolidated debt. As you focus on paying down the loan, each on-time payment will be recorded and reported to the credit reporting bureaus and the positive activity will help to strengthen your credit score over time. To put the impact into perspective, your on-time payment history accounts for about 35% of your FICO credit score.

Comparing your options for debt consolidation

There are a few popular methods of debt consolidation: personal loans, balance transfer cards and home equity loans. Compare your options using this table:

Debt Consolidation Loan Balance Transfer Credit Card Home Equity Loan
How Does It Work? Consolidate many types of debt into one payment with a personal loan Move your high-interest credit card debt to a balance-transfer card Convert your home’s equity to cash you can use to pay off more expensive debts
Learn More Learn More Learn More
Minimum Credit Varies by Lender Very Good Fair
Benefits Fixed APR

Fixed monthly payments

May be eligible for lower interest rates

You can consolidate many types of debt

Some cards have introductory 0% APR periods

May be eligible for lower interest rates

Lowers the number of credit card bills to track

Fixed APR

Fixed monthly payments

Secured loans tend to have lower interest rates

You can consolidate many types of debt

Risks Your credit will take a hit if you miss payments

You may be subject to fees and penalties

Interest rates vary widely for borrowers

May be charged penalty APR or deferred interest charges

Can only be used to consolidate credit card debt

You run the risk of going into foreclosure

You could go underwater on your home, taking out more money than it’s worth

Best For… Borrowers seeking to consolidate several types of debts. Borrowers with robust credit profiles who have the discipline to pay off the debt on better terms. Homeowners who seek lower interest rates and are willing to put up their house as collateral.

Debt Consolidation FAQ

Debt consolidation can help you keep track of payments, get a lower interest rate and pay off your debt faster. It’s a smart money move under the right circumstances. You’ll want to weigh your options to see if this is a good idea for your situation.

For example, it might not be worth consolidating if you have a small balance that you can pay off within a year. But debt consolidation is a good idea if you have too many payments to keep up with, or if you can qualify for a lower interest rate.

Consolidating your debt can affect your credit score. There might be a small drop in your credit score after consolidating debt, since you are taking out a new credit product or loan. You might also see a dip in your credit score if you settle a debt or work with a debt management service.

Some borrowers can see their credit score increase by consolidating debt, particularly credit card balances. Using a personal loan to pay off credit card balances will lower your credit utilization ratio, which can give your credit score a boost.

Whatever the initial effect has on your credit score, debt consolidation can help you increase your credit score over the long term. If you choose an option with affordable payments, you can build up a healthy payment history, which is central to a good credit score.

Applicants with good credit will have a wider range of debt consolidation options. They can more easily get approved for loans and will qualify for lower interest rates and fees that will keep them affordable.

Still, there are options for bad credit, and some lenders are willing to work with applicants who have fair credit. Borrowers with bad credit can look for other ways to qualify for a debt consolidation loan. A secured loan might be easier to qualify for, for example, or they could apply for a loan with a qualified cosigner.

There are three primary methods of debt consolidation: personal loans, balance transfers and home equity loans. To learn about your options, you might consider seeking credit counseling for free or low-cost guidance on your debt relief options.

There is no “best” way to consolidate debt, as that will depend on your financial situation.

A debt consolidation loan is a type of personal loan. It’s unsecured, which means it doesn’t require collateral like a car or house. Since there’s no collateral, lenders rely heavily on your credit score, income and debts to determine if you’re a good borrower and set your interest rate.

With a debt consolidation loan, you can combine many types of debts, such as student loans and credit card debt, into one monthly payment.

There may be costs that come with consolidating debt, so it’s important to review all rates, fees and costs for each option you consider. For example, some (but not all) personal loans charge origination fees, while a home equity loan can incur new appraisal fees and closing costs. Even a credit card balance transfer can come with a fee.

Once you decide what type of debt consolidation is best for your situation, you should try to get loan offers. LendingTree offers several tools that can connect you with potential lenders who can meet your needs. You could then compare consolidation offers to see which could give you the lowest costs when you look at both fees and interest rates.

These loans have the potential to save you money, but it’s not a guarantee. Whether you could save money by consolidating debt will depend on your costs and what you’d pay after consolidation. You’ll have the best chance of saving money by consolidating if you use this option to secure a lower interest rate or pay debt off faster.

If your goal is to get out of debt faster, consolidating your debts can be a smart move. Consolidating with a personal loan, for example, can give you the option to choose a shorter loan term, so your debt will be paid off sooner.

Some applicants can qualify for personal loan rates that are lower than what they’re paying on existing debts. This can lower how much this debt is costing them so that more of their debt payments are applied to taking down their balance.

If you want to use debt consolidation to pay off debt faster, keep an eye on monthly payments. A shorter loan term will increase payments, and you’ll want to make sure they’re affordable.

Debt consolidation involves getting a new loan or credit account and using it to pay off existing debt. But there are other options for handling debt. See these debt relief options:

  • Debt settlement is a service offered by some companies that charge a fee to try to negotiate down the amount of debt you owe or eliminate your balance for less. You can also try to settle your debts on your own without the help of a company.
  • Credit counseling is a service that a counselor provides to help you manage expenses and debt payments more effectively. They’ll help you get on a budget and debt plan that is affordable and will get you on the path toward paying off debt.
  • Debt management programs allow a company to manage debt repayment on your behalf. Typically, you’ll make a single payment to your debt management company, which can negotiate debts and monthly payments. The service provider will divvy up your payment to each of your creditors, often keeping part of it as a monthly administration fee.

There are several places to seek a consolidation loan. LendingTree tools could help connect you with lenders willing to work with you. They can quickly generate multiple offers in one place, making it easy to compare offers and start your search for the right one.

Here are some other places to look:

Secured loans are types of debt that are tied to an asset you own, called collateral. Home equity loans and HELOCs are common examples of secured debt that can be used for consolidation.

Your collateral property acts as a guarantee for this debt. Because of this, some borrowers can more easily qualify for a secured loan and might pay less in interest. But if you stop repaying the loan, the lender has the right to claim the collateral and sell it to settle the debt.

Unsecured credit doesn’t require that you have or put up collateral for the loan. Types of unsecured debt used for consolidation include personal loans. With no collateral on the line, lenders will rely more on an applicant’s credit score to decide whether to extend a loan and how to set rates.

Consolidation isn’t always the right move. Here are a few situations when you might want to consider other options ahead of consolidating debt:

  • You have small balances that you can pay off quickly. If you owe a smaller balance that you could repay in a matter of months, it might be faster and more cost-effective to make extra payments and eliminate this debt on your own.
  • Refinancing might be a better option. Debt consolidation isn’t right for every type of debt. For student debt, it might be smarter to refinance with a new private student loan instead of consolidating. Refinancing may also be wiser for car loans or home loans.
  • You’ll pay more if you consolidate debt. Some people can save money by consolidating debt, but not everyone will. If you’re offered interest rates on debt consolidation loans that are higher than what you’re paying, you might want to stick with your existing debt instead of consolidating.
  • You can’t qualify for the credit needed to consolidate debt. If you have bad credit, you might not get approved for a personal loan or other credit to consolidate debt. It could be smarter to work on improving your credit score and revisiting the idea of consolidation once it’s improved.

Your debt would be unaffordable, even after consolidation. When you’re struggling to keep up with payments and your debt has become a crisis, you might need a different solution. This is when you might want to consider a debt relief program that will help you get your debt under control. For some people, filing for bankruptcy might also be worth considering as a way to get relief.