According to the latest data from the Federal Reserve, total consumer debt in the US reached $3.6 trillion in 2016, with total average American debt being over $13 trillion in 2017. This comes out to roughly $11,140 in unsecured debt for every single American. These unsecured debts include credit cards, personal loans, medical bills, student loans, and many more. And despite an improving economy, every year this total continues to increase. This ever-growing amount of unsecured debt has to lead many borrowers to look for ways to simplify their multiple monthly payments and create a plan to finally get these debts paid off. One solution to finally getting your debts under control is to take advantage of debt consolidation. In this article, we will discuss exactly what debt consolidation is, how it can benefit you, and how to complete the process if you think you would be a good candidate.
Let’s start with some basic information about debt consolidation and how it works.
What is Debt Consolidation?
Debt consolidation is the process of combining multiple unsecured debts into a single new loan with a single monthly payment. You are basically taking out one new loan that will pay off your multiple smaller loans. That also means you’ll only have to pay one single bill every month instead of multiple bills.
Who is a Good Candidate for Debt Consolidation?
Debt consolidation is typically utilized by those with high amounts of consumer debt spread out over multiple loans (credit cards, student loans, personal loans, medical bills, collection accounts, etc).
What Types of Unsecured Debts are Eligible for Debt Consolidation?
The following types of unsecured debts are currently eligible for consolidation:
- Student loans
- Credit card bills
- Store cards
- Personal loans
- Medical bills
- Collection accounts
- Payday loans
What are the benefits of debt consolidation?
Simplify Your Payments
Paying several different companies each month is a waste of time and energy. With debt consolidation loans, people make one monthly payment instead of a number of payments to various companies. It makes it easier to manage payments, and in this busy world, simplicity is always welcome.
A Defined Timeline to Pay off Your Debts
Most consolidation programs are designed to help you pay off unsecured debts completely in 2 to 5 years. (Student loan consolidation is the exception and typically takes longer.
Lower Your Payment and Interest Rate
Debt consolidation MAY offer you a lower payment and interest rate but it is usually at the expense of a longer payment term, often resulting in you not actually saving on interest at all.
Save Money on Fines and Late Fees
By consolidating your multiple loans into one new loan, you will only have one monthly payment to make which can significantly lower your potential for making late payments and accruing additional fees going forward.
May Improve Your Credit Score
Debt consolidation can gradually help you improve your credit score by allowing you to start building a track record of making your monthly payments in full and on time. You can learn more about additional ways to repair your credit here.
Stop Collections Calls
Certain debt consolidation options can be an excellent way to finally get your creditors to stop calling you about missed or late payments!
What are the drawbacks of debt consolidation?
While consolidating your debts can have numerous benefits, there are also some drawbacks to be aware of before you start:
Might Require Minimum Debt Amounts
Smaller debt amounts may be ineligible for debt consolidation by some companies (however, there are often other options available in these circumstances).
Debt Consolidation Might Not Be Quick
Debt consolidation is a process, not a quick fix. It often requires meeting with a credit counselor, setting up a strict budget, and making timely payments over a period of several years.
You Might Pay More In Interest
If your debt consolidation plan involves extending the term with your new loan, you may end up paying more in interest payments over that time period.
Could Hurt Your Credit Score
Certain debt consolidation options have the disadvantage of lowering your credit score as a result.
What Are My Debt Consolidation Options?
If you decide that debt consolidation might be the right choice for you, there are three main avenues you might consider:
Debt Management Plans (DMPs)
Debt management plans are often the preferred choice of those seeking debt consolidation as they can offer consumers the most advantages.
These plans involve working with a certified credit counselor who will look at your entire financial situation and what monthly payment you could afford based on your income and expenses. These counseling services are typically free and should be utilized by anyone seeking to enroll in a DMP program.
Most DMPs are done through non-profit agencies that have established relationships with most large financial institutions. This allows them to negotiate with your creditors on your behalf to not only simplify your payments going forward but to save you substantially on interest and fees in the process.
Upon enrolling in a DMP, you will then make one payment to your credit counseling agency each month who will then pay your creditors based on the negotiated terms of your new consolidated loan.
DMPs allows you to make just one affordable payment each month and have your entire new loan paid off in 2 to 5 years. These programs are also the best option for improving your credit score.
Debt settlement is an option often recommended for those who simply cannot afford the monthly payments required for a DMP.
Where DMP programs require you to repay your debts in full with more favorable payment options, debt settlement programs involve working with your creditors to actually lower the total amount you have to repay. This negotiated amount can be up to 50% of the original amount owed and is typically required to be repaid within 3 to 5 years.
Your monthly payments are usually lower with a debt settlement program but you will likely also deal with increased collection calls and a negative effect on your credit report as a result.
Debt Consolidation Loans
Debt consolidation loans involve taking out a new loan from a new lender that is used to pay off all of your smaller loans.
There are several different types of consolidation loans, including
- 0% Interest Balance Transfer Credit Cards – This can be a great option if you only have a few thousand dollars in credit card debt. You can simply open up a new credit card offering 0% interest and then transfer your current balances to this new card. You can also learn more about lowering your credit card payments here.
- Personal Loans – These are a type of consolidation loan that allows you to combine multiple unsecured loans into a single new loan, often at a lower interest rate. These unsecured loans are often made by private companies and can vary widely based on your credit score.
- Home-Equity Loans – Often referred to as “equity loans,” “home equity installment loans,” or “second mortgages,” these loans can be a way of consolidating multiple unsecured debts by borrowing against the current equity value of your home. Borrowers can take out a home-equity loan and use the funds to pay off existing debts leaving them with only one monthly payment going forward. However, these loans often require you to pledge your home as collateral, so your loans are no longer unsecured. Click here to learn more about home-equity loans.
- Student Loan Consolidation – This can be a great option for those with multiple student loans who want the simplicity of one monthly payment, possibly even lower than their previous amount. You can learn more about loan consolidation here.
Consolidation loans can be a quicker solution than a DMP or debt settlement program but may involve higher interest rates and fees.
Some lenders may also require you to pledge additional collateral on the loan, so it is critical to do your research before you make a final decision.
Debt Consolidation FAQ
Below are some additional questions that we frequently receive from readers regarding debt consolidation:
How do I know which consolidation option is the best fit?
If you are unsure about which option is right for you, start by talking with a free credit counselor about a debt management program (DMP) as these often have the most benefits for borrowers. If a DMP is not the right fit, ask your counselor for a recommendation.
Will debt consolidation damage my credit score?
That depends on which option you choose. Debt management programs are a great option for improving your credit in the future while debt settlement and debt consolidation loans typically harm your credit in the beginning.
What if I just want to consolidate a smaller amount of credit card debt?
One solution for smaller credit card debts is to simply take out a new 0% interest credit card and transfer your current balances. You can also learn more about lowering your credit card payments here.
What if I don’t have a credit score at all?
Taking the appropriate steps to build your credit will make borrowing money in the future much easier. Here is our guide on how to build up your credit the right way.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.