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Debt consolidation rolls several debts into one easy-to-manage payment. It’s a strategy you can use to simplify the debt payoff process and save some money on interest. If you’re overwhelmed with multiple high interest debts, it may be just what you need to become debt-free faster.
How does debt consolidation work?
If you have many unsecured debts to pay off, you can turn them into a single monthly payment through debt consolidation. When you consolidate your debt, you won’t have to manage different payments, interest rates, payment dates and payback periods. You’ll eliminate confusion and make the process of repaying debt more manageable.
While there are several debt consolidation strategies at your disposal, a debt consolidation loan is a popular option. A debt consolidation loan is a personal loan you use to combine multiple debts with a new one, ideally with a lower interest rate and more favorable terms. You’ll receive a lump sum of cash to pay off your debts, and then make a single monthly payment on your new loan. (Some lenders can pay off your creditors directly, however.)
You can use debt consolidation to pay off consumer debt such as:
- Credit cards
- Medical bills
- Utility bills
- Payday loans
- Collection bills
Once you figure out all the unsecured debt you owe, use our debt consolidation loan calculator to get an idea of how long it will take you to repay them. The calculator compares the cost of all your debts versus the cost for a debt consolidation loan. It can help you determine how much money you can potentially save.
Pros and cons of debt consolidation
Where to find debt consolidation loans
Banks, credit unions and online lenders all offer debt consolidation loans. Here are a few options you can choose from.
24 to 60 months
36 or 60 months
24 to 84 months
$7,500 to $40,000
$4,000 to $25,000
$5,000 to $100,000
0.00% - 4.99%
1.00% - 5.00%
No origination fee
Minimum credit score requirement
How to shop debt consolidation lenders
You can compare debt consolidation loans in our personal loan marketplace. You’ll want to review such information as:
- Interest rates
- Borrowing limits
- Repayment terms
- Fee structures
- Minimum credit score requirements
Online lenders tend to offer the most competitive loan terms, as they have lower overhead costs compared with banks. However, if you prefer having face-to-face time with your lender, you could seek information from local banks. Credit unions can be a great option as well, as they are member-run and may have fewer fees.
Is debt consolidation worth it?
Consider the following questions as you weigh whether debt consolidation is right for you:
- Are you overwhelmed by multiple debts?
- Would you like to potentially save money on interest charges?
- Do you wish you had lower monthly payments?
- Do you have a plan in place for staying out of debt in the future?
- Do you have a good to excellent credit score?
If you’re an individual with good credit who is looking for an easier way to manage your debt, you may benefit from consolidation. However, if you’re dealing with a spending problem and don’t have the best credit, this strategy may not be a good fit.
3 debt consolidation alternatives
Balance transfer credit card
A common alternative to a debt consolidation loan is a balance transfer. With this repayment strategy, you’ll take out a balance transfer card and move your existing credit card debt onto it. The benefit of a balance transfer card is that they commonly come with a promotional 0% APR. You can avoid interest charges by repaying your debt in full during the promotional period.
However, if you don’t repay your debt in full, you’ll be responsible for all of the interest that accrued. There’s also a balance transfer fee you’ll typically pay; it’ll be a percentage of the balance you transfer. That said, this strategy is best for consumers who can aggressively repay what they owe and are sure the balance transfer fees they’ll pay will be offset by the amount they save on interest.
Debt settlement involves negotiating with your creditors to settle for less than what you owe. You can hire a debt settlement company to negotiate with creditors on your behalf, though that may be a risky move. That’s because some debt settlement companies will ask you to stop making payments in order to starve creditors into negotiating over a payoff amount; you’re also liable to pay fees.
Bankruptcy is a legal process where your assets are used to pay off debts (Chapter 7) or you repay debt via a debt repayment plan (Chapter 13). Since bankruptcy comes with long-term legal and financial consequences, it’s wise to consult a bankruptcy lawyer before pursuing it.
Debt consolidation can be a great way for you to take control of your debt and improve your finances. However, it is not right for everyone so it’s important to do your research before you take the plunge.