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Juggling multiple credit card payments, medical bills and other debts each month can get complicated. Especially if you’re making each one manually. One solution is to consolidate your debt so it’s all in one place. It can give you more manageable repayments and save you money on interest. But you likely won’t qualify if your total debt load is more than 50% of your yearly take-home pay.
Debt consolidation works by moving multiple debts into one, new account. You can consolidate your debt with a personal loan or balance transfer credit card.
Debt consolidation loans and balance transfer credit cards are not for everyone. When done under the wrong circumstances, it could hurt your finances more than it helps.
Debt consolidation generally involves taking out a loan or credit card, but you have several different types to choose from. The best option for you depends on how much you owe, your income and credit score.
A debt consolidation loan is an unsecured personal loan you use to pay off one or more account balances. Typically, you can borrow up to $50,000 with APRs ranging from 5% to 36% that you pay back over three to seven years.
Generally, you need good to excellent credit to qualify.
You can use any personal loan for debt consolidation. But some lenders specialize in debt consolidation, specifically. Often these will pay off your creditors directly and are easier to qualify for with a high debt load.
A balance transfer credit card allows you to move multiple credit card balances onto one new card. Often these come with 0% APR promotional rates that last up to 21 months. Generally, you also need good to excellent credit to qualify.
Debt consolidation loans vs. balance transfer credit cards
A secured loan is a personal loan that you back with collateral. This can be anything of value that you own, like a savings account or CD. They’re typically easier to qualify for than other types of funding and can be a great option if your credit is less-than-perfect or you have a high debt-to-income (DTI) ratio.
Also known as a second mortgage, home equity loans and lines of credit (HELOCs) are backed by the amount you currently own in your home — or equity.
These typically come with lower rates than unsecured personal loans. But the risk is greater: You could lose your home if you default.
A 401(k) loan allows you to borrow from your retirement fund balance at a low interest rate — without paying early withdrawal fees.
You’re effectively paying interest to yourself, so it can be one of the least expensive debt consolidation options. But you stand to owe it all back in one lump sum if you leave your current employer.
Best for: Anyone repaying student loans who wants better rates or terms.
The best way to consolidate your student loans is by combining them into one new loan with a student loan refinancing provider. This allows you to change up your loan term, get a more competitive rate — or both.
Generally, you need to have at least a year of repayment history and excellent credit to qualify.
Student loan consolidation usually refers to a federal Direct Consolidation Loan, which you can use to consolidate multiple federal student loans into one. It won’t change your rate, but it can help you qualify for more repayment and forgiveness options. But it’s not available for private student loans — only federal.
That depends on the method you use to consolidate your debt. Here’s how much the two most common types of debt consolidation cost:
However, you might still end up saving money in the long run if you’re consolidating high-interest debts with a new loan or credit card with a lower rate and shorter term.
Consolidating debt can be helpful, but it’s not for everyone. Weigh the pros and cons of debt consolidation before taking the plunge:
Understanding what types of debt you can consolidate is the first step toward deciding what consolidation options you might want to consider — if at all. People generally consolidate these kinds of debts:
Look for offers for service members and veterans. Often these have lower rates and more favorable terms than your average personal loan. Especially if your credit is less than perfect
When you take out a new loan or credit card, creditors do a hard credit check that temporarily lowers your score by a few points. However, if it helps you pay off your debt faster and make on-time payments, your score could improve in the long run.
If you’re denied, that could be a sign that debt consolidation isn’t the right choice for you.
If debt consolidation doesn’t seem like the best option for you, consider one of these alternatives.
When your debt becomes unmanageable and a balance transfer credit card or consolidation loan just won’t cut it, you may want to consider turning to debt relief. Debt relief comes in several forms such debt settlement, bankruptcy, debt management, negotiation or credit counseling. Generally, debt relief is for those whose debt is over 50% of their annual income or have only a nominal chance of paying off their unsecured debts within a reasonable time frame.
Debt consolidation can be a great option if you’re looking for lower rates or more manageable repayments. If that’s the case, you can learn more about how to apply and what to expect by reading our guide to personal loans.
But it’s not ideal if you have poor credit or a high DTI. In that case, you might want to consider other debt relief options.Back to top
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