{"menuItems":[{"label":"How does debt consolidation work?","anchorName":"#how-does-debt-consolidation-work"},{"label":"How to consolidate debt in 5 steps","anchorName":"#how-to-consolidate-debt-in-5-steps"},{"label":"Pros and cons of debt consolidation","anchorName":"#pros-and-cons-of-debt-consolidation"},{"label":"6 ways to consolidate your debt","anchorName":"#6-ways-to-consolidate-your-debt"},{"label":"What to look for in a service provider","anchorName":"#what-to-look-for-in-a-service-provider"},{"label":"Beware of scams","anchorName":"#beware-of-scams"},{"label":"Is debt consolidation a good idea?","anchorName":"#is-debt-consolidation-a-good-idea"},{"label":"Debt consolidation alternatives","anchorName":"#debt-consolidation-alternatives"},{"label":"Compare debt consolidation providers","anchorName":"#compare"},{"label":"Bottom line","anchorName":"#bottom-line"}]}
Generally, it involves taking out a personal loan or credit card and using those funds to pay off your credit cards and other accounts.
How does debt consolidation work?
Debt consolidation works by moving multiple debts into one new account. You can consolidate your debt with personal loans or balance transfer credit cards.
One of the biggest advantages of debt consolidation is the savings opportunities. If you have a few loans with high interest rates, then consolidating them together with a lower interest rate can mean saving money over time. Additionally, having multiple debts together on one account can make money management easier.
Whether or not you save money can depend on the method you choose — such as a home equity loan or balance transfer card. If you go with a debt consolidation loan, you may get a blended rate that reflects the rates on the previously separate accounts.
What kind of debt can I consolidate?
Many people consider consolidating these kinds of debts:
- Credit cards
- Unsecured personal loans
- Medical bills
- Business loans
- Retail credit cards
- Tax debt
- Student loans
How to consolidate debt in 5 steps
If you’re having trouble keeping up with multiple credit card and loan payments, consolidating your debt can help you lower your interest rate and handle your debts with a single monthly payment — but which option is best will depend on how quickly you can afford to pay off your debts.
Step 1: Collect the information you’ll need.
Week 1. Start by collecting the information and documents you need to calculate your expenses, including:
- Bills and expenses. Phone, utility, memberships, rent/mortgage and any other regular payments.
- Your bank statements. Download these online at most banks or visit a branch if you don’t have an online account.
- Any other important financial records. This includes bills, final notices and receipts for everyday purchases like groceries, restaurants and clothing.
Next, let’s exercise our bookkeeping skills:
- Write down your expenses for the past month. Draw this out on paper or start a new spreadsheet to stay organized.
- Add everything up. Get a ballpark figure for how much to budget for expenses each month. To be as accurate as possible, calculate your expenses for the last three months and find the average.
- Calculate your income. If your expenses exceed your income, you need to re-evaluate. Consider the expendable costs you’re currently engaged in and think about the costs/luxuries you can do without.
Extra tips
- Go through your inbox and online bank statements to make sure you’re on top of your finances and everything you owe.
- When calculating how much you owe, remember to consider automatic debits from your account (such as monthly bills or charity donations) that could impact your debt levels. If you decide to consolidate your debts, you’ll need to organize for these direct debits to be taken from your new account.
- If you’re having trouble calculating how much you spend on fluctuating expenses like grocery and entertainment, keep all of your receipts for a month. If you bank online, you can also keep track of all of your debit card payments.
Step 2: Check your credit score
Week 1. Once you know how much you owe and how much to budget, consider which debt consolidation solution offers you the most value. Before you make a decision, consider which options you’re eligible for.
A balance transfer credit card will require a higher credit score than a debt consolidation loan. If you don’t know your score, it’s easy to order a free copy of your credit file.
If you receive your credit file and find that your score isn’t up to scratch, you might want to improve your credit score before you apply for a new credit card or loan. Keep in mind that rejected applications can have a negative impact on your credit score, so rushing the process and applying for a solution you won’t be approved for could backfire.
Improve your credit score
Step 3: Compare, compare, compare
Week 2. If you’re considering consolidating your debt, there are a few key questions you should ask yourself to determine which option is right for you:
- When does the promotional offer end? If a balance transfer card comes with a 0% offer, it’s likely that it will only last for six to 24 months. Calculate whether you could repay your entire balance by the end of this period. If not, consider a debt consolidation loan or a card with a longer promotional period.
- How much can I transfer? Most balance transfer credit cards only accept balance transfers up to a fixed amount (or a percentage of your total debt).
- Who can I transfer from? Most providers won’t let you transfer balances from an existing account with the same bank. You might also find that you’re unable to transfer debts from partnered, affiliated or co-owned banks. Confirm which banks you can transfer between.
- Other fees and features. For balance transfer cards, details such as the annual fee, interest rates on purchases and rewards programs could also impact how you use the card during and after the balance transfer is in place.
- Eligibility requirements. Make sure you earn the minimum income requirement, have a good credit history and meet any other conditions before applying.
Balance transfer credit cards vs. debt consolidation loans
Step 4: Apply wisely
Week 2. Once you’ve compared your options and decided on one, it’s time to apply for your balance transfer card or debt consolidation loan. Choose the green Apply now button on the table to be directed to a secure online application with your preferred bank.
Most online applications will take approximately 10 to 15 minutes to complete and submit. To make sure the application process goes smoothly, ensure that you meet the eligibility requirements and have all of the required documentation on hand before beginning the application.
If you apply online, many providers can you give a response within 60 seconds or so based on the information you have provided. If you’re approved, you’ll receive confirmation and information packages regarding the card or loan and your account.
If there’s a problem or the provider needs to cross-check some information you’ve provided, your application status may be left pending. If you haven’t received any feedback for a few days, contact the provider directly to discuss the status of your application.
Pro tip for balance transfers
If the card has a promotional balance transfer offer, it’s best to apply for the balance transfer while you’re filling out the rest of the application so you can request that your debt is transferred to your new account as soon as possible. This will allow you take advantage of the full length of the promotional offer.
Have the details of your transfer, including how much you need to transfer and where from, ready before beginning the application. If you’ve decided to close your old account, you’ll also need to contact your old bank to organize this.
If you didn’t meet the eligibility requirements or failed to provide the necessary documents, you’ll receive a notification that your application has been rejected.
Remember that multiple rejected applications will have a negative impact on your credit score. If your application is denied, take the time to understand why, compare your options and wait a few weeks before applying again.
Consider debt relief if you don’t qualify for debt consolidation
Step 5: Start consolidating
Week 3. If your application for a balance transfer credit card has been approved, you can expect to receive your card within one to two weeks. If you applied for the balance transfer at the time of application, your balance should’ve transferred to your new account.
If your application for a debt consolidation loan has been approved, you’ll need to start paying off your creditors as soon as the money is deposited into your account.
If you haven’t already, spend some time mapping out a realistic budget and set of goals that’ll help you keep your monthly payments on track.
Use these three simple rules to keep yourself moving forward:
- Set monthly goals.
- Use calendar notifications to remind you when payments are due.
- Set a final date for when you’d like to have your debt repaid — preferably before the promotional period finishes if you’re using a balance transfer credit card
Pros and cons of debt consolidation
Consolidating debt can be helpful for some people, but it’s not a silver bullet. Consider these pros and cons:
Pros
- Money saving opportunity. You may qualify for a lower interest rate than you’re currently paying, saving you cash in the long run.
- One monthly payment. Can be easier to manage than multiple payments.
- Firm repayment plan. Repayment plan can help motivate you to get out of debt faster.
Cons
- Could end up with more debt. If you’re in debt because of spending habits, consolidating your debt won’t help unless you also take steps to cut back. In fact, it can make it worse by freeing up your revolving credit.
- Might increase interest cost. Taking out a loan with a long term to reduce your monthly debt payments means there’s more time for interest to add up.
- Unhelpful with large amounts of debt. If you owe more than half of what you make in a year, you might not qualify for a loan or balance transfer credit card.
6 ways to consolidate your debt
Debt consolidation generally involves taking out a loan or credit card, but you have several types to choose from. The ideal option for you depends on how much you owe, your income and credit score.
1. Debt consolidation loan
- Best for: Paying off large amounts of debt over several years at a low interest rate.
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.
Pros
- Won’t lose any assets
- Lower monthly cost with a longer term
Cons
- Pay more in interest with a longer term
- Potential origination fee
- Good to excellent credit required
2. Balance transfer credit card
- Best for: Paying off credit cards over 21 months or less with no interest.
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.
But it’s not free. Often there’s also a balance transfer fee, which can range from 3% to 5% of the amount you transfer, usually with a minimum. You might also pay an annual fee. Generally, you need a credit score of at least 670 to qualify — what lenders consider to be good credit.
Pros
- Interest-free intro period
- Combine multiple credit card balances into one
- Gives you a debt payment deadline
Cons
- High APR after promotional period compared to loans
- Potentially high monthly cost for large amounts of debt
- Balance transfer fee
3. Secured personal loan
- Best for: Homeowners with large amounts of debt or mediocre credit.
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.
Pros
- Lower rates with mediocre credit
- Easier to qualify for
Cons
- Risk losing assets
- Not as many options as an unsecured loan
4. Home equity loans and HELOCs
- Best for: Getting a more competitive rate with mediocre credit.
Also known as a second mortgage, a home equity loan or a home equity line of credit (HELOC) is backed by the amount you currently own in your home or by equity.
These typically come with lower rates than unsecured personal loans. But the risk is greater: You could lose your home if you default.
Pros
- Lower rates by securing the loan with your house
- Good credit not required
- Fixed and variable rates available
Cons
- Risk losing home if you default
- Must already have a mortgage
- Expect to pay around 2% to 5% in fees
5. 401(k) loan
- Best for: Anyone with rock-solid job security and a 401(k) retirement account.
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, but you’re doing it with after-tax income — otherwise 401(k) contributions are before you pay taxes. You also stand to owe it all back in one lump sum if you leave your current employer — and you could be hit with penalties if you can’t pay it back immediately.
Pros
- Lower interest rates
- Borrowing from yourself
- Easy to qualify for with lots of debt
Cons
- You could pay early-withdrawal fees if you lose your job
- Lose out on retirement investments
- 401(k) funds lose bankruptcy protection
6. Student loan refinancing
- Best for: Anyone repaying student loans.
The best way to consolidate your private 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.
Pros
- Save on interest with a lower rate
- Cut monthly cost with lower rate or longer term
- Switch servicer that handles repayments
Cons
- Good to excellent credit required
- Lose benefits on federal loans
- Hard to qualify if you have a high DTI
Personal vs. debt consolidation loans
You can use any personal loan for debt consolidation. But some lenders specialize in debt consolidation, specifically. Often these companies pay off your creditors directly and are easier to qualify for with a high debt load.
Consider the following factors when comparing financial services companies:
- Accreditation is a strong start. Most legitimate companies that negotiate with creditors are accredited with either the American Fair Credit Council (AFCC) or the International Association of Professional Debt Arbitrators (IAPDA).
- Check that it’s not on the FTC’s list of banned companies. Because there are scams in the debt relief world, you should check the FTC list of companies and people banned from providing these negotiation or settlement services before you sign up for any program.
- Transparency is also a good indicator. If you can’t find vital information like how much a program costs, how fees are calculated and how long the company has been in business, consider working with another provider.
- Costs should be within a reasonable range. Financial services companies often charge a fee for either a percentage of the total amount of debt you have or the amount they’re able to reduce your debt by. Most credit counseling services are free, though some may charge a small fee depending on your state.
- Whether the company uses direct or indirect negotiation can be a tell. Look for a provider that negotiates with your creditors directly. Indirect negotiation is uncommon and may put your information at risk when it’s transferred between companies.
- Eligibility determines whether applying is even an option. Many companies have restrictions on your total debt balance, types of debt and where you live. And some are geared toward different credit scores and income ranges.
- Customer reviews on sites like the BBB and Trustpilot are a good place to look out for red flags and learn what you can expect from a provider.
What to know about financial services costs
While hiring a company to negotiate your debt can be helpful for a lot of people, know what you’ll have to pay before you get started.
- Fees aren’t only based on your initial debt. Fees depend on your total debt and are hard to predict. It depends on how quickly your accounts are settled, how interest accumulates, if you continue payments, whether you have late fees and more.
- A settled account is taxed as income. Any settled account with a savings of more than $600 is considered taxable income. After taxes, you could end up saving only 10% — or less.
There is a tax loophole, however: You might be exempt if your tax liabilities are greater than your assets at the time of the settlement. Talk with a tax specialist before enrolling in a settlement program to learn how this exemption might affect you.
Many companies that negotiate with creditors for a fee are legitimate. But there are scams out there. It should set off alarm bells if you see a company committing any of these offenses:
- It charges upfront fees for its services.
- It guarantees a specific amount of debt savings.
- It promises it can settle lawsuits and stop calls from collection agencies.
- It advertises itself as a new government program that can erase your debt.
It also pays to be aware of your state laws. Ensure that any company or attorney you’re working with holds the appropriate licenses and follows state regulations.
Student loan debt scams
The most recent government crackdown has focused on companies that claim to settle student loan accounts — one reason why most legit financial service companies won’t touch student loans.
Watch out for any offers that try to get you to sign up for a new program fast, customer service reps that ask for your login information and anyone who claims to be a representative from the Department of Education.
Is debt consolidation a good idea?
Debt consolidation can be a smart move depending on your financial situation. Generally, consolidating debt is a good idea if you owe less than you make in a year. And because debt consolidation involves opening a new credit account, it’s best for people who can qualify for a loan or new credit card.
You’ll have the most options if your credit score is above 670 and your monthly debt payments are equal to less than 40% of your monthly income.
If you qualify, It can offer a lower monthly payment and a lower interest rate, which can help you save over the life of the loan. However, when done under the wrong circumstances, debt consolidation could hurt your finances more than it helps.
Can I consolidate my debt with bad credit?
It’s possible to consolidate your debt with bad credit. Some lenders provide debt consolidation loans to individuals with less-than-perfect credit. In these cases, the APR you qualify for may not be as low as for someone with better credit.
Other options like 401(k) loans, secured personal loans and HELOCs might be easier to qualify for. But you risk losing your collateral, retirement funds or even your home if you can’t repay. And generally, balance transfer credit cards aren’t available to bad credit applicants.
Debt consolidation for service members
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.
If you enter active duty, talk to any of your current creditors, too. Your rates may be lowered in accordance with the Servicemembers Civil Relief Act.
Debt consolidation alternatives
If debt consolidation doesn’t seem like the best option for you, consider one of these alternatives.
- Credit counseling. Set up a free meeting with a financial adviser to go over your options and come up with strategies to get out of debt at a credit counseling agency.
- Debt management. Have a credit counseling agency negotiate with your creditors to reduce your interest rate and monthly payments and set you up with a debt management plan.
- Debt settlement. Sign up to have a debt relief company negotiate down your balance for a debt settlement or work with your creditors directly in an attempt to lower your balance.
- Bankruptcy. Best saved as a last resort, you can file for Chapter 11 or 13 bankruptcy to have a judge either eliminate or reduce the amount you owe to your creditors.
The FTC recommends assessing your finances and contacting your creditors before looking into debt consolidation alternatives. If you’ve been rejected for debt consolidation, find out why before you turn to alternatives. You might qualify in the near future by paying off your debts or taking steps to boost your credit score.
Do-It-Yourself options
If you don’t qualify for debt consolidation, you may be able to handle your debt on your own with determination and a manageable budget.
- Repayment strategies can give you a solid framework. It won’t result in a reduction to the amount you owe, but you can adopt a repayment strategy like the debt avalanche or snowball to build your budget and pay off your debts in manageable chunks.
- DIY negotiations may help you get a handle on your debt. Financial services companies negotiate on your behalf, but you can reach out to your creditors on your own. Explain your situation and see if you can lower the amount you owe or modify your repayment schedule.
Compare debt consolidation providers
Explore your options by costs and requirements. Select the Go to site button for more information about a particular lender.
Bottom line
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.
Week 3. If your application for a balance transfer credit card has been approved, you can expect to receive your card within one to two weeks. If you applied for the balance transfer at the time of application, your balance should’ve transferred to your new account.
Hello. I am looking for a debt consolidation loan/credit card that I can use to get a better rate and consolidate my $8,000+ debt with. But I have a slightly above 600 score with 4-7 aplications in the last year. I have been declined for just about every loan/cc I have applied for.
Hi there!
Thank you for contacting Finder.
I can understand your concern. There are several reasons why you can be denied a debt consolidation loan which include your employment status, your credit score, outstanding loan, other liabilities, and your overall capacity to repay the loan amount. That is why before you apply for any loan, it’s very important to check the eligibility criteria and requirements to see if you can qualify so you can avoid multiple rejections as that could also have a negative impact on your credit score.
Cheers,
Danielle
Typically what kind of loan works best to pay off attorney fees?
Hey Robert,
Thank you for your comment. You can check out our page on personal loan uses to find out what you can and cannot use a loan for with certain lenders.
As Finder is a financial comparison website providing general information, we are not permitted to provide our users with personalized financial advice.
I hope this helps.
Best,
Maria
Hello Judy,
Thank you for reaching out to us.
The first thing you need to know is the legitimacy of a preapproved loan offer. After that, you can also check legitimate payday loans to ensure you don’t get scammed.
I hope this information helps.
Let us know if there is anything else that we may assist you with.
Cheers,
Ash
I’m low income my husband is a vet. We need 25, 000.00 to pay off all that we owe.
Hi Lorrie,
Thank you for contacting finder. We are a comparison website and general information service, we’re more than happy to offer general advice.
You are on the right page. You may customize, review, and compare the offers available on the table. Once you have selected one, you may proceed by clicking the green “Go to Site” button.
I hope this helps.
Cheers,
Danielle
Where are areas I can get loans in Puerto Rico? Or Who lends to U.S Citizens who reisde out there?
Hi Luis,
Thank you for your inquiry.
At this time we do not have access o lenders that offer loans to US citizens living in Puerto Rico. It may be worth checking with local banks and private lenders in Puerto Rico to see if they offer any personal loans that you may be eligible for.
Please make sure that you meet all the eligibility criteria and read through the loan Terms and Conditions before applying and making a decision on whether it is right for you.
I hope this information has helped.
Cheers,
Harold