Debt Consolidation
Debt 101: What Is Debt?
When you have bills to pay, it’s easy to lose track of them and miss a payment. If you’re struggling to keep up with your debt, or if you just want to save money on credit card bills, consider debt consolidation.
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Sifting through loan companies in search of a debt consolidation loan that offers competitive rates for your credit score can be time-consuming. To assist you in your search, we scored lending companies based on the categories most important to borrowers, such as APR, repayment terms and eligibility criteria. Many of these lenders also let you prequalify online, meaning you can check your rates with no impact on your credit score.
Best for low rates: LightStream
Best for long repayment terms: LightStream, SoFi Bank, N.A and Wells Fargo Bank
Best for high loan amounts: SoFi Bank, N.A and Wells Fargo Bank
Best for small loan amounts: Upgrade and Upstart
Best for no origination fee: LightStream, SoFi Bank, N.A and Wells Fargo Bank
Best for low credit requirements: Happy Money and Upstart
Best for a peer-to-peer loan: Prosper
Debt consolidation is a debt management strategy that involves rolling one or multiple debts into another form of financing. For instance, you may take out a debt consolidation loan or balance transfer credit card and use it to pay off existing debts with better terms.
Ideally, you’ll want to consolidate your debt to a lower APR than what you’re currently paying. This can help you save money on interest, lower your monthly payments and pay off debt faster.
Although there are many ways to consolidate debt, it generally works the same way: You pay off one or more debts using a new debt. Some popular debt consolidation methods include personal loans and balance transfer credit cards.
Depending on your unique situation — how much debt you have to consolidate, your credit score, how soon you need the funds, what type of debt you have and other factors — one method may work better for you than another.
→ Personal loans:
Combine many types of debt into one fixed monthly payment with a debt consolidation loan.
→ Balance transfer credit cards:
Consolidate credit card debt onto a balance transfer credit card with a lower APR.
→ Home equity loans:
Tap your home’s equity to pay off debt by using your home as collateral.
→ Debt management plans:
Enroll in a DMP through a certified nonprofit credit counseling agency to repay your debt in three to five years.
1. Track debt repayment
Once you consolidate your debts, regardless of which method you use, you’ll have one bill to pay. This can help you stay on top of your finances and set an attainable goal for your debt repayment plan.
2. Save money on interest
Ideally, you’ll use a financial product with a lower interest rate and fewer fees than what’s charged on your current debts. This reduction in interest will help you save money you’d have been required to pay had you not consolidated.
3. Build your credit score
Paying off credit card debt with a loan can have an immediate effect on your credit score by lowering your credit utilization ratio. This is the total amount of credit available to you versus the amount of credit card debt you have.
Credit counseling is a nonprofit service to help you manage expenses and debt payments more effectively. A credit counselor may set you up on a debt management plan and even negotiate debts and monthly payments on your behalf.
Debt settlement involves negotiating with your creditors to lower the amount of debt you owe and reduce fees charged to your account. Some companies offer this service, but these programs may come with high fees and can severely damage your credit.
Bankruptcy is a legal process offering debt relief for an individual or business. When you file for bankruptcy, your assets may be sold to repay your creditors, or you may be enrolled in a court-ordered debt repayment plan.
Debt consolidation can help you keep track of payments, get a lower interest rate and pay off your debt faster. It’s a smart move under the right circumstances, but you’ll want to weigh your options to see if this is a good idea for your situation.
For example, it’s not worth consolidating if you can’t get a lower APR on the new form of financing than what you’re currently paying on your debts. But when you consolidate debt for a lower APR, you’ll save money in the long run, and you may be able to save money on monthly payments, too.
Debt consolidation can affect your credit score. There might be a small drop in your credit score after consolidating debt, since you are taking out a new credit product or loan. You might also see a dip in your credit score if you settle a debt or work with a debt management service.
Some borrowers see their credit score increase by consolidating debt, particularly credit card balances. Paying off credit card balances lowers your credit utilization ratio, which can give your credit score a boost.
Whatever the initial effect on your credit score, debt consolidation can help you increase your credit score over the long term. If you choose an option with affordable payments, you can build up a healthy payment history, which is central to a good credit score.
Applicants with good credit will have a wider range of debt consolidation options. They can get approved more easily for balance transfer credit cards with introductory 0% APR periods and personal loans with lower APRs.
Still, there may be options for consolidating debt if you have bad credit. You could try a secured loan, such as a home equity loan, which may come with a lower APR. There are also 401(k) loans, which let you borrow money from your own retirement fund without a credit check.
That will depend on your financial situation. There are a few primary methods of debt consolidation, including personal loans, balance transfer credit cards and home equity loans. You may also consider a 401(k) loan or debt management plan to consolidate debt. To learn about your options, talk to a credit counselor who can provide free or low-cost guidance on your debt relief options.
It always costs money to borrow money, which is why you want to find the debt consolidation option with the lowest APR to save yourself the most money in the long run.
Different debt consolidation options come with their own set of interest rates and fees. For example, some personal loan lenders charge origination fees, while a home equity loan can incur appraisal fees and closing costs. Even a credit card balance transfer can come with a fee.
Debt consolidation has the potential to save you money, but it’s not guaranteed. To save money, you’ll have to consolidate your debt into another form of financing that has a lower APR than what you’re currently paying on your debts. Before you consolidate debt, it’s important to take a look at your current credit card and loan agreements to determine the APR you’re paying, so you can shop around for financial products that will save you money.
If your goal is to get out of debt faster, consolidating your debts can be a smart move. Consolidating with a personal loan, for example, can give you the option to choose a short loan term, so your debt will be paid off sooner. And if you get a lower APR than what you’re currently paying on your debts, then you can pay off your debt faster even if you pay the same amount of money toward your debt each month.
There are several places to seek a consolidation loan, including banks, credit unions and online lenders. You can also see if you prequalify for a loan through LendingTree’s network of lenders using our personal loan marketplace. Just fill out a single form, and you’ll know if you’re eligible within minutes.
Secured debt is tied to an asset you own, called collateral. Some borrowers can more easily qualify for a secured loan and even pay less in interest. But if you stop repaying the loan, the lender has the right to claim that collateral and sell it to settle the debt. Home equity loans are a type of secured debt that can be used for consolidation.
Unsecured debt doesn’t require that you have or put up collateral for the loan. Personal loans and credit cards are examples of unsecured debt. With no collateral on the line, lenders will rely more on an applicant’s credit score to decide whether to extend a loan and how to determine your APR.