When yo🅷u’re working to pay off a large amount of debt, it can often feel difficult to get ahead. You might make multiple monthly payments to different lenders or credit card companies. And wit✨h high interest rates on these types of debts, it’s easy to feel that you aren’t making progress.
That’s where debt consolidation comes in. When you consolidate your debt, you can replace multiple debts and monthly payments with just one. Additionally, you might quali⛄fy for a lower interest rate, helping you pay off your debt more quickly and save on interest.
- What is debt consolidation?
- When is consolidation wise?
- Consider other options
- How to consolidate debt
- Frequently asked questions
What is debt consolidation?
Debt consolidation is the process of combining several existing debts into a single debt. Many borrowers use it for credit cards, which have high interest rates and compounding interest, both of which make ℱit difficult to reduce your principal amount. However, you can use debt consolidation for nearly any type of debt.
There are several ways to consolidate debt. A personal loan is one of the most popular options. Others inಞclude a home equity loan, a home equity line of credit (HELOC), a balance transfꦡer credit card, or a consolidation loan or refinancing for education debt.
When is debt consolidation a good idea?
Debt consolidation is generally a smart strategy when your current debt has become unaffordable or unmanageable. Here🐓 are some situations where debt consolidation might be a good idea:
- You’re making multiple monthly payments: Making multiple debt payments each month can complicate your finances, and you may even find that you forget about one. Consolidating your debt allows you to go from multiple monthly payments to just one.
- You’re paying high-interest rates: Credit card debt and many personal loans tend to have higher interest rates. Borrowers often find that they can reduce their rates significantly by applying for debt consolidation.
- Your debt will take a while to pay off: Most types of debt consolidation will require some type of fee, whether it be a balance transfer fee or a loan origination fee. For that reason, it’s probably only worth consolidating if you think it will take you more than a few months to pay off your debt.
- You’re committed to meeting payment due dates: Consolidating your debt and then failing to pay on time can make matters worse. Before consolidating, make sure you’re committing to paying off your debt and staying debt-free.
- You have good credit: To qualify for any type of debt consolidation, you’ll have to apply for a new loan or credit card. For that reason, it works best for borrowers with good credit scores who can qualify for a loan at a reasonable interest rate.
Consider other options
Debt consolidation makes sense for plenty of borrowers, but it’s not always the right move. For example, debt consolidation probably isn’t a good fit if your d꧒ebt is smaller and you expect to pay it off in just a few months. In that case, it’s better to simply focus on your monthly payments rather than consolidating.
Debt consolidation likely isn’t the right fit if your credit score is on the lower end. Unfortunately, poor credit or thin credit history can hold you back from qualifying for new loans and credit cards. And even if you do qualify, you might find the interest rate is unaffordable — and possibl🙈y higher than your existing rate.
What’s more, you shouldn’t use debt consolidation if you aren’t committed to paying off your debt. Moving your credit card balance to a new credit♎ card or a personal loan can be a good start, but it won’t help if you just end up accumulating new debt.
Additionally, some people use home equit😼y loans and HELOCs for debt consolidation. And because these loans ar🅺e secured by your home, you could end up losing your home if you fail to make your monthly payments. It’s better to have a credit card you can’t pay than a home equity loan you can’t pay.
How to consolidate debt
Consider the following options if you’re thinking a𒈔bout consolidatin꧒g your debt:
- Debt consolidation loan: This type of loan is a personal loan used to combine your debts. A personal loan is a fixed-rate term loan, meaning you borrow a certain amount and pay it off at a fixed interest rate over a predetermined time frame, usually between 1 and 5 years.
Personal loans can come with lower interest rates for borrowers with good credit, but rates can be quite high for those with poor credit. - Balance transfer card: When you open a balance transfer card, you move your entire credit card balance from one card (or several cards) to another.
Credit card issuers often offer introductory annual percentage rates (APRs) of 0% for anywhere from 6 months to 2 years. If you pay the balance off within that time, you won’t pay any interest. But at the end of that period, interest kicks back in (and may even be retroactive). - Home equity loan: When you take out a home equity loan, you’re borrowing against the equity you’ve built in your home.
Home equity loans are often referred to as second mortgages since your home acts as collateral. These loans are typically fixed-rate loans that have the advantage of low-interest rates, but your home is at risk if you can’t make your payments. - Home equity line of credit (HELOC): A HELOC is similar to a home equity loan in that you’re borrowing against your home.
But a HELOC isn’t a term loan with a fixed rate. Instead, it’s a revolving debt, like a credit card, where you can spend and pay off your balance as many times as you want until the repayment period begins. Also similar to credit cards, HELOCs have variable interest rates (but like a home equity loan, it’s usually a much lower rate than a credit card). - Student loan consolidation: If you have multiple student loans you want to consolidate, then you can use a consolidation loan.
The federal government offers these loans for federal loans. And if you have private loans, you can use student loan refinancing to consolidate your student loans.
Frequently asked questions
Debt consolidation can be a great op🎃tion to help you manage debt, but it can also be complicated. To help you decide if it’s right for you, we answer some of the most frequently askಞed questions about debt consolidation.
What are the eligibility requirements?
The eligibility requirements for debt consolidation depend on how you plan to consolidate your debt. No matter what route you choose, you’ll need to meet your lender’s requirements for minimum credit score and debt-to-income ratio.
What’s the difference between debt consolidation and debt settlement?
Debt settlement is when you settle your debt for less than you owe. Debt consolidation sꦅtill requires that yo🅺u pay off the full balance — you simply combine multiple debts to pay them off together.
Can debt consolidation hurt my credit score?
Yes, debt consolidation can hurt your credit score, at least in the short term. When you ♛apply for debt consolidation, you’ll have a hard inquiry on your cr𝐆edit report, which could ding your score. You could also lose points by opening a new debt account and closing existing accounts. However, your score is likely to bounce back in the long run as long as you continue making your monthly payments on time.