Debt Consolidation: What Is It and Is It Right for You?
Struggling to manage your bills and loans? Getting hit with high rates, late fees and confusing terms? You might want to take a closer look at debt consolidation.
What sounds like a complicated concept is actually pretty simple. Basically, debt consolidation happens when you roll multiple debts into one loan with a single monthly payment. It doesn’t eliminate your debt, rather it helps simplify your finances and make everything easier to track.
Consolidation works for many types of debt, such as:
- Credit cards
- Store cards
- Payday loans
- Personal loans
- Auto loans
- Student loans
- Lines of credit
- Medical bills
- Utility bills
- Other big bills
Pros and cons of debt consolidation
Debt consolidation can offer a range of benefits, including lower interest rates to save you money, simplified payments to help your budgeting, and even an improved credit score when you make payments on time.
But there are also a few important points to consider:
- Fees and promotional rates
Depending on how you choose to consolidate debt, you may need to pay upfront fees, such as a credit card balance transfer fee. And some debt consolidation options offer a low introductory interest rate that may go up in the future – just be sure to read the fine print and don’t be afraid to ask questions before you sign on the dotted line.
- Eligibility requirements
If your credit score is less than perfect, you may have a hard time qualifying for many types of debt consolidation. In that case, your best bet is to focus on improving your credit first. And when consolidating, your financial situation will be reviewed too. If your debts add up to more than 50% of your income, lenders may consider you too risky to approve.
- Other debt solutions
Debt consolidation is great for some people, but it’s not a silver bullet. If you’re seriously overwhelmed by debt, you may want to look into debt settlement to negotiate a new repayment plan with your lenders.
Types of debt consolidation
The most common ways to consolidate debt include:
- Credit card balance transfer
Many credit cards have a 0% balance transfer offer, which means you can move your balances from other credit cards and avoid paying interest during the promotional period, typically lasting around 12 to 20 months. You can check your existing credit cards to see if they offer 0% balance transfers, and it’s worth looking at new credit cards to compare and find your best offer.
Keep in mind, you usually have to pay a balance transfer fee of around 3% of the total balance you’re transferring. And after the promo period, your balance reverts to your standard credit card rate, making a balance transfer a good option if you plan to pay off your balance during the promo period.
- Personal loan
Many people choose personal loans to consolidate debt thanks to their flexibility and stability. A personal loan provides a lump sum of money, which you can then use to pay off your other debts how you like. Personal loans generally offer fixed rates and terms, meaning you can depend on a steady monthly payment for the life of your loan.
Personal loan rates can vary greatly, however, so double check your offer. If your potential new personal loan has a higher rate than your existing debts, it’s probably not a good move and you’ll want to keep shopping around for a better rate.
- Home equity loans or lines of credit
If you’re a homeowner, you may want to tap into your home equity for more affordable debt consolidation. Home equity loans and lines of credit often have lower rates than personal loans and offer additional perks like longer repayment terms for lower monthly payments.
The downside, of course, is that you put your home up as collateral, meaning if you fail to repay your debt, you risk losing your home. Like any loan, you’ll want to review the details and your repayment plan to make sure you’re making the right decision for your situation.
Is debt consolidation right for you?
Ask yourself a few questions to help decide if debt consolidation is right for you:
- Do you have a good credit score? You need good credit to qualify for most debt consolidation options.
- Do you have high interest rates? If you're able to lower your interest rates through debt consolidation, you could save big in interest charges.
- Do you have a significant amount of debt? If your total debt is less than a few thousand dollars and you plan to pay it off within the next year, it may not be worth the effort to consolidate.
- Do you have financial issues to address first? If you overspend or can’t keep up with your bills, you may need to review your finances and make budget changes before consolidating debt.
- Do you struggle to keep track of your debts? A big benefit of debt consolidation is simplifying your finances with one monthly payment instead of multiple payments.