What is Debt Consolidation?
Debt consolidation is the process of combining multiple debts into a single loan with potentially lower interest rates and simpler monthly payments.
It’s crucial to understand that debt consolidation doesn’t erase debt; it restructures it. The key purpose of debt consolidation is to make debt repayment more manageable and cost-effective, although it doesn’t reduce the overall amount owed.
Loans for Debt Consolidation
| Company | Overall Rating | Interest | Loan amount | |
|---|---|---|---|---|
recommended  | 5.99% – 35.99% | $500 – $35,000 | See offer | |
recommended  | 5.99% – 35.99% | $250 – $35,000 | See offer | |
recommended  | 8.49% – 35.99% | $1,000 – $50,000 | See offer | |
recommended  | 5.99% – 35.99% | $100 – $35,000 | See offer | |
 | 11.69% – 35.99% | $1,000 – $50,000 | See offer | |
 | 5.99% – 35.99% | $500 – $10,000 | See offer |
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| recommended |
| recommended |
| recommended |
| recommended |
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| Get Started |
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| See offer |
| See offer |
| See offer |
| See offer |
| See offer |
| See offer |
| Company | Overall Rating | Interest | Loan amount | Get Started |
|---|---|---|---|---|
| recommended | 5.99% – 35.99% | $500 – $35,000 | See offer | |
| recommended | 5.99% – 35.99% | $250 – $35,000 | See offer | |
| recommended | 8.49% – 35.99% | $1,000 – $50,000 | See offer | |
| recommended | 5.99% – 35.99% | $100 – $35,000 | See offer | |
| | 11.69% – 35.99% | $1,000 – $50,000 | See offer | |
| | 5.99% – 35.99% | $500 – $10,000 | See offer |
How Does Debt Consolidation Work?
- Acquire a New Loan: Secure a loan large enough to cover all debts you wish to consolidate.
- Repay Existing Debts: Use the new loan to pay off various debts, such as credit card balances, auto loans, student loans, and personal loans.
- Single Monthly Payment: Instead of multiple payments to different lenders, you’ll make one monthly payment on the new loan.
- Potential Interest Savings: The new loan often has a lower interest rate than the average of your previous debts, potentially saving money over time.
- Consider Repayment Duration: While monthly payments may decrease, extending the repayment period means you might remain in debt longer.
Different Methods to Consolidate Debt
Balance Transfer Credit Cards: Some credit cards offer introductory periods when they charge low or no interest on balances that you transfer to the card within a set period of time. This gives you an opportunity to save on interest and make more progress paying off your debt.
Personal Loans: If you can get a personal loan with a lower interest rate, you can pay off your higher-interest credit card balances, which may allow you to pay off your debt faster.
Retirement Account Loans: You may be able to take a loan from your retirement account to consolidate and pay off debt. However, you need to be careful to pay it back according to the retirement plan’s rules or you may face taxes and penalties.
Read More: 401(k) Loans: What You Need to Know
Home Equity Loan or Line of Credit: Homeowners who’ve built up an ownership stake in their home may be able to take out a loan using their home as collateral. These secured loans typically offer lower interest rates than credit cards or personal loans. But beware: If you don’t pay it back, you could lose your home.
Pros and Cons of Debt Consolidation
Pros:
- Lower Interest Rates: Consolidation often reduces the overall interest rate, especially compared to high-interest credit card debts.
- Simplified Payments: Combining multiple debts into one loan simplifies monthly payments and financial management.
- Improved Credit Score: Over time, consistent on-time payments can lead to an improved credit score.
- Reduced Stress: Managing one debt instead of multiple can be less stressful and easier to track.
- Potential for Faster Debt Repayment: With a lower interest rate, more of your payment goes towards the principal, potentially speeding up debt repayment.
Cons:
- Temporary Credit Score Impact: Initially, your credit score might dip due to the hard inquiry from applying for a new loan.
- Risk of Extended Repayment Period: Lower monthly payments can mean a longer repayment period, possibly leading to more interest paid over time.
- Requires Discipline: Consolidating debt is only beneficial if you avoid accumulating new debt.
- Potential Fees: Some consolidation loans might come with fees or penalties.
- Not a Fix for Spending Habits: Without addressing the underlying spending habits, debt consolidation might not offer a long-term solution.
What is a Debt Consolidation Loan?
A debt consolidation loan is essentially a standard personal loan used specifically to combine several debts into one. This means it functions like any other personal loan, but its purpose is to streamline multiple debts, such as credit card balances, into a single payment.
By doing this, you’re not getting a special type of loan, but rather using a regular personal loan to simplify and potentially reduce the cost of your debt repayments.
How to Get a Debt Consolidation Loan
Getting a debt consolidation loan involves a few steps:
- Check Your Credit Score: You’ll typically need a credit score of at least 700 to qualify for a debt consolidation loan with a competitive interest rate. Although this is not always the case, and having collateral like a house or retirement account can make up for a lower credit score.
- List Your Debts and Payments: Create a list of all the debt accounts you plan to consolidate. This will help you understand how much you are paying each month, the total you will pay on them if you do not consolidate, and the amount you’ll need to take out to consolidate all of these loans.
- Compare Loan Options: Now that you know how much you’ll need to take out, you can compare the options available. You can shop around with online lenders as well as to inquire at local banks and credit unions to see what interest rates and terms you may qualify for.
- Apply for a Loan: Once you’ve decided that a debt consolidation loan is the best way for you to manage your debt, you will need to apply for the loan. If you have poor or average credit, you may still be able to obtain a personal loan. These loans often come with high-interest rates, so be sure that as you shop around, you ensure that a consolidation loan will either help you decrease your monthly payment or decrease your overall interest rate.
- Close the Loan and Make Payments: After your loan application is approved, the lender will disburse the funds either directly to your creditors or to you. You can then use these funds to pay off your existing debts. After that, you will start making monthly payments on your new loan.
How Does Debt Consolidation Affect Your Credit?
- Short-term: Possible initial dip in credit scores.
- Long-term: Can improve credit scores if it leads to consistent, on-time payments and reduced debt levels.
- Key Consideration: Effective for managing high-interest balances across multiple accounts, but requires disciplined repayment planning.
