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Katie OrmsbyDebt Consolidation Expert

Katie enjoys helping readers make sense of Debt Consolidation options. She's previously written business and shopping features for The Seattle Times and Seattle Met magazine. She has a degree in journalism and political science from the University of Washington.

How Debt Consolidation Works

If the number of payments you’ve got every month is becoming overwhelming, a debt consolidation loan may help lighten your load. Whether you’re struggling with multiple, high-interest credit cards or private student loans that’ve gotten out of hand, streamlining your finances can help you get ahead in the long run. When you consolidate your debt, you bundle all your financial stress into one monthly payment.

Often with lower interest rates than credit cards, debt consolidation loans let you take back control. Available through online lenders, banks, and credit unions, a debt consolidation loan can be a good option for getting out of debt and moving forward with your goals.

What is Debt Consolidation?

Consolidating debt is a financial strategy that combines multiple types of debt. Having too many high-interest payments can affect your credit score and your ability to make more significant financial steps. Debt consolidation loans are designed to lower your interest rates while leaving you with one monthly payment. Over time, they can save you money and allow you to focus more precisely on your financial future.

Pros and Cons of Debt Consolidation

Pros
Cons
One monthly payment
May have an origination fee
Lower interest rates
Doesn’t solve behaviors that led to debt
Can build or repair credit over time
Credit score may temporarily dip

3 Reasons To Consolidate Your Debt

No matter what’s motivating you to get out of debt, a debt consolidation loan can be a valuable tool to help you get out of debt once and for all. Here are three common reasons people consider the option:

1. Your Bills Are Unmanageable

Sending out multiple payments every month can quickly add up to a large sum of money. It can also be hard to keep track of multiple payment dates. The more payments you have, the more likely it becomes that you might miss a due date. Once you’ve consolidated your debt, you’ll have one manageable monthly payment.

2. Your Debt Has High-Interest Rates

Debt consolidation loans often have lower interest rates than credit cards. When you consolidate high-interest debt into a lower-interest loan, you can save money in the long run. Plus, you’ll only have one interest rate to handle. So, you won’t need to worry about prioritizing one debt over the other based on the interest.

3. There’s No End in Sight

Even if you’re paying more than the minimum payment, it can seem like credit card balances never budge. Debt consolidation loans can help you see the light at the end of the tunnel. Unlike revolving lines of credit, loans have established timelines. Since there’s a fixed number of payments and a definitive payoff date, it can be easier to keep your goals in sight.

Of course, you’ll also want to analyze what caused your debt to mount in the first place. There may be an underlying behavior that needs to be addressed to make sure your debt doesn’t become unmanageable again. For example, someone who went into debt by overspending with credit cards may want to keep tabs on future spending by tracking expenses.

How Much Debt Do Americans Have?

As of 2021, American consumer debt topped $14.6 trillion. With the average American carrying a debt of over $90,000, it’s safe to say that you’re not alone. Struggling to stay on top of your debt is more commonplace than you might think. As you can see below, American adults of every age have debt. The most common types of debt are credit card debt, student loans, and mortgages.

Average Debt at Every Age

Generation
Age Range
Average Debt
Gen Z
18 - 23
$9,593
Millennials
24 - 39
$78,396
Gen X
40 - 55
$135,841
Baby Boomers
56 - 74
$96,984
Silent Generation
75+
$40,925

Source: CNBC

What Factors Affect Debt Consolidation Interest Rates?

Much like rates for mortgages and personal loans, these three factors affect debt consolidation rates:

Credit Score

Your credit score can play a significant factor in getting the best debt consolidation loan rate. While someone with a higher credit score is more likely to get a lower interest rate, having a lower score doesn’t mean it’s impossible to get a loan. Someone with a lower credit score may not get as advantageous of a rate, but they may be able to beat their current credit card rates.

Debt-to-Income Ratio

A debt-to-income ratio can also affect your debt consolidation loan interest rate. Lenders often require the ability to dedicate no more than 40% of your income rate to debt payments, and they often use your current debt-to-income percentage to help determine your interest rate. If you’re on the lower end of a DTI, then you’ll have a better chance of getting a low interest rate.

Loan Term

Unlike credit card debt, debt consolidation loans come with a fixed repayment term. Choosing a shorter-term loan may result in a lower interest rate than a loan stretched out over a long period of time. Make sure to read all the fine print about any fees associated with late payments or early payoff.

Can You Get a Debt Consolidation Loan With Bad Credit?

Getting a consolidation loan with bad credit can be a little tricky, but it’s not impossible. While many lenders cater to those with credit scores higher than 630, those with lower credit scores may be able to get a debt consolidation loan with a higher interest rate. As a workaround, those with poor credit scores may be able to get approved for a better rate with a co-signer.

How Do Credit Scores Break Down?

Credit Score Rating
Credit Score Range
Excellent
800 - 850
Very Good
740 - 799
Good
670 - 739
Fair
580 - 669
Poor
300 - 579

Source: CNBC

How Does Debt Consolidation Affect Your Credit Score?

The best debt consolidation companies will do their best to avoid causing any damage to your credit, but it’s not unusual for your credit score to briefly dip when you first get a loan. For instance, a temporary dip can be caused by a hard credit inquiry. Additionally, if you enroll in a program that involves not making scheduled payments on existing debt, then your credit score can temporarily go down. But with consistent and timely payments, credit scores often start to rise again.

Frequently Asked Questions

Can you save money by consolidating debt?

Rolling all your debt into one new loan is a way to potentially save money. If you have credit card debt and other high-interest debt, you may be able to get a lower interest rate with a debt consolidation loan. And, over time, the money you save with a lower interest rate can start to add up.

What types of debt can you consolidate?

If you have credit card debt, high-interest personal loans, and private student loan payments to make every month, a debt consolidation loan could simplify your life. All three types of debt are often able to be consolidated, which can make debt more manageable.

How do you avoid debt consolidation scams?

Unfortunately, you’ll want to keep your eyes open for scams when seeking a debt consolidation program. Always make sure your provider is accredited and operates on a secure website.

What are alternatives to debt consolidation loans?

While a debt consolidation loan can be a great option, it isn’t the only one. Options like creating a strict budget and working with a credit counselor might work for some. If you own a home, other alternatives include cash-out refinance, home equity loans, and home equity lines of credit.

What are the cons of filing for bankruptcy?

Bankruptcy is serious. Until your credit rebounds and it’s removed from your credit report in 7 to 10 years, you may face a loss of property and credit cards. Bankruptcy can severely weaken your credit score and cause issues with future purchases, loans, or rentals.

Too Long, Didn’t Read?

Credit card bills and other debt might feel like insurmountable obstacles, but a debt consolidation loan can help you get it under control. By lowering your number of monthly payments and potentially lowering your interest rate, a consolidation loan offers a roadmap to a more manageable financial future. If you want to get out of debt, then a debt consolidation loan can be a useful tool to pay off debt.