What is Debt Consolidation? And How You Should You Consolidate Debt?

Debt consolidation combines multiple debts into one payment, often with lower interest rates. It simplifies repayment and helps you pay off your debts faster.
woman holding bill with smile happily after no debt

If you’re struggling with a lot of high-interest debt, like credit card and medical debt, debt consolidation might be a good option.

Combining your unsecured debt into one loan can help simplify the debt payoff process and save you time and money.

What Kinds of Debt Consolidation Are There?

Debt consolidation is a strategy that rolls multiple, high-interest debts into one easy-to-manage payment.

It can eliminate the need to track several debts with different due dates. It may lower your interest fees and help you become debt free faster.

Here are a few of the most common ways to consolidate debt.

Debt Consolidation Personal Loan

A debt consolidation loan is an unsecured personal loan designed for debt consolidation.

You’ll receive a lump sum of money upfront and put it toward your high-interest debts or allow your lender to pay your creditors directly. Then, you’ll repay the loan with a single, manageable monthly payment.

If you qualify for a debt consolidation loan with a lower interest rate than the rates you’re paying on your current debts, you can save money on interest.

While loan amounts for debt consolidation loans vary, most lenders let you borrow anywhere from $500 to $100,000 with terms of up to 7 years.

Pros and Cons of Debt Consolidation Loans

Credit Card Balance Transfer

You can consolidate your debt with a balance transfer credit card. Ideally, the card would come with a 0% or low-interest introductory period.

Once you get approved for a balance transfer card, you’ll transfer all your debts to it. You’ll save on interest if you pay back your balance before the interest offer ends.

Usually, introductory periods for balance transfer credit cards range from 12 to 21 months. Many cards also come with a balance transfer fee, which may be between 3% and 5% of the amount you transfer.

Pros and Cons of Credit Card Balance Transfers

Home Equity Loan

If you own a home with positive equity (the difference between how much your home is worth and what you owe on your mortgage), you can use a home equity loan to consolidate debt.

You’ll receive a set amount of money at once so you can put it toward your debt. Since a home equity loan is secured and tied to your home, you may land a lower interest rate than you’d be able to get with a debt consolidation loan.

The caveat is the lender can foreclose your home if you don’t make your payments.

Pros and Cons of Home Equity Loan

How to Consolidate Debt

Are you ready to pursue debt consolidation? There are specific steps you should take before, during, and after the process.

What to Do Before Debt Consolidation

Take inventory of your debt

List all the high-interest, unsecured debt you owe. Include the interest rate and monthly payment for each type of debt. This will give you a good idea of where you stand.

Explore debt consolidation options

Think about which debt consolidation strategy makes the most sense for your unique situation. You can choose from a debt consolidation loan, balance transfer credit card, or home equity loan.

Consult a credit counselor

Most credit counselors will give you free advice on what to do with your debt. It might be worth your time and effort to reach out to one and get their opinion on debt consolidation.

Understand why you’re in debt

Get to the bottom of why you’re in debt in the first place. This can help you avoid future issues.

Create a budget

Look at your income and expenses so you can design a monthly budget. The budget should tell you how much money you have to put toward debt consolidation.

What to Do During Debt Consolidation

Review your terms and fees

No matter which debt consolidation strategy you use, you’ll have an agreement that outlines terms and fees. Be sure to read it carefully to avoid unwanted surprises.

Enroll in automatic payments

Even one late or missed payment is bound to take a toll on your credit. That’s why it’s a good idea to set up automatic payments with your bank, credit union, or online lender.

Increase your income

Think of ways to boost your income so you have more money to put toward your debt. Ask for a raise at work, pick up a side hustle, or sell items you no longer want or need.

Reconsider your spending habits

During debt consolidation, your primary goal should be to pay off debt. To achieve it, you may have to look at how you spend money regularly and make changes so you don’t get deeper into debt.

Be patient

Consolidating debt doesn’t guarantee instant results. This strategy takes time. You’ll succeed as long as you’re patient and continue to make your payments.

What to Do After Debt Consolidation

Celebrate your success

Treat yourself once you pay off your debt through debt consolidation. You’ve worked hard and deserve a reward.

Build an emergency fund

If you don’t already have a fund for emergencies, now is the time to create one. Even though you can still use loans and credit cards after debt consolidation, you’d be better off with an emergency fund to cover unexpected expenses.

Monitor your credit cards

Debt consolidation doesn’t automatically close your credit cards. That’s why it’s wise to keep track of them so you’re aware of any changes that may arise.

Create a new budget

Once you complete the debt consolidation process, you should work hard to avoid new debt. To do so, you might need to reassess your current budget and make some modifications.

Pay attention to your credit

Your credit can determine the financing opportunities you qualify for in the future. Sign up for credit score alerts or pull copies of your credit reports from AnnualCreditReport.com so you know whether you need to improve your credit or keep up the good work.

Seek professional help

If you’re struggling to stay out of debt after debt consolidation, it may be time to consult a financial advisor or credit counselor. These pros can help you design a solid financial plan and establish healthy financial habits.

How to Choose the Best Loan for You

Not all debt consolidation loans are created equal. As you do your research, it’s essential to compare these factors.

Type of Loan

Figure out what type of loan is suitable for your particular situation. Maybe you’d benefit from a personal loan that will pay your creditors directly. Or perhaps a balance transfer loan is the better option. The ideal loan depends on your unique needs and preferences.

Loan Amount

The amount of debt you’d like to pay off will help you determine the loan amount you’re seeking. Fortunately, most lenders offer loans with high amounts, up to $50,000 or even $100,000. Do your best only to borrow what you need, or you may steer yourself further into debt.

Loan Repayment Period

Lenders typically offer repayment periods ranging from one to seven years. Remember that while a more extended repayment may mean lower monthly payments, it will cost you more in interest. If possible, choose a shorter repayment period.


There is no shortage of lenders on the market. Before you commit to one, do your research and make sure they’re reputable. Check out reviews and ratings on websites like the Better Business Bureau (BBB) and TrustPilot.

Interest Rates

The interest rate you receive will determine the overall cost of your loan. A low rate is ideal, but you might have to settle for a higher-than-average rate if you don’t have the best credit. Shop around to find the lowest rate you qualify for.

Origination and Other Fees

It’s not uncommon for lenders to charge origination fees and other fees that can increase your overall cost of borrowing. Since fees can add up quickly, do the math and make sure debt consolidation is still worthwhile.

Why Choose Debt Consolidation

Debt consolidation can be an intelligent move if any of these situations apply to you.

You have Multiple High-Interest Debts

Debt consolidation is worth exploring if you have several unsecured debts with high interest rates. This is particularly true if your credit has improved since you’ve taken them out.

Your Debt is Unsecured

The goal of debt consolidating debt is to get rid of unsecured debt payments, like credit cards, medical bills, and payday loans. You’re not a good candidate for this strategy if most of your debt is secured.

You’re Overwhelmed with Debt

Debt consolidation may help if you’re struggling to keep tabs on all your debts and repayment dates. It can simplify the debt payoff process.

You Have Good-to-Excellent Credit

Lenders and creditors usually look for a strong credit history for debt consolidation loans and balance transfer credit cards. You shouldn’t have any trouble getting approved if you meet this requirement.

You Can Pay Back Your Debt Consolidation Loan in a Few Years

Debt consolidation loans typically come with a set payoff date. Make sure the date is realistic and you’re confident you can repay a loan by then.

You Plan on Staying Out of Debt

Debt consolidation is a great way to get out of debt. But for it to be worth your time and effort, you must commit to healthy financial habits down the road.