Debt consolidation combines several debts into one loan or account. It can be a great option if you have multiple high-interest debts, since you may qualify for a lower interest rate.
While debt consolidation doesn’t eliminate your debt, it can make it easier to repay.
Debt consolidation allows you to get a new loan or credit card to pay off other debts. After consolidating, you would have just one monthly payment with a single interest rate, so you wouldn’t have to juggle multiple due dates.
A debt consolidation loan can also save you money if you can lock in a lower interest rate. If you opt for a longer repayment term, you’ll have lower monthly payments but will pay more in interest over the life of the loan. Either way, debt consolidation loans come with a set repayment term, so you know exactly when you’ll pay off your debt.
There are a few ways to consolidate your debt, depending on your situation. Here are some of the most popular options:
1. Balance transfer card
This type of credit card allows you to move your existing card balances to a new card. Many of these cards offer an introductory 0% APR (annual percentage rate) for as long as 21 months. You can use this promotional period to pay off your debt without any interest.
Keep in mind that once the introductory period is over, you’ll be charged a standard APR by the card issuer, which could be higher than what you were paying on your other cards.
2. Debt consolidation loan
This is a type of personal loan that you can get from online lenders, banks, and credit unions. With a debt consolidation loan, you combine your debts into one loan and monthly payment. You may be able to qualify for a lower APR than what you’re paying on your other debts, but you’ll likely need good to excellent credit.
Also, be mindful that debt consolidation loans may extend your repayment term in order to lower your monthly payment. This means you’ll pay less each month but pay more in overall interest.
Related: Learn more about getting a personal loan on Credible.com
3. Home equity loan
If you have equity in your home, you can consider borrowing against the equity in your home to consolidate debt.
The benefit of this option is that home equity loans tend to have lower interest rates. The downside is that this type of loan uses your home as collateral — so if you fail to pay it back, you could lose your home.
Debt consolidation may be a good idea if you’re looking to simplify debt repayment. If you’re currently juggling multiple monthly payments or even missing payments, debt consolidation could offer some relief.
This may also be a good option if you’re looking to lower your APR with a debt consolidation loan or balance transfer credit card. If your goal is to pay off your debt faster, temporarily getting rid of interest or lowering your rate could help.
Debt consolidation isn’t a good option, however, if it won’t really save you any money or simplify your debt situation — or if it merely keeps you in a debt cycle trap. Consider prequalifying with different debt consolidation lenders to find out if you could potentially save money — prequalifying online is simple and won’t affect your credit.
Related: Learn more about getting a personal loan on Credible.com
Before you make a decision on debt consolidation, check out the answers to some commonly asked questions.
The maximum amount of debt you can consolidate varies by lender and their loan amounts (or by card issuer, if you opt for a balance transfer card). Remember, banks, credit unions, and online lenders offer debt consolidation loans, and each sets its own loan limits and other eligibility requirements.
It’s best to compare a few lenders online once you know how much debt you’re looking to consolidate. With Credible’s partner lenders, you may be able to borrow as much as $100,000.
A debt consolidation loan may temporarily hurt your credit when you apply for it, since the lender will check your credit. This is known as a hard inquiry. Applying for multiple debt consolidation loans at different times can negatively impact your score, since they may count as separate hard inquiries. But hard credit checks usually only affect your credit for one year.
Additionally, a new debt consolidation could lower the average age of your credit accounts, which could also negatively impact your score. Your credit history length accounts for 15% of your FICO credit score.
On the plus side, making your payments for a debt consolidation loan on time and in full each month can actually improve your credit.
Debt consolidation loan eligibility requirements vary by lender, but many have minimum credit score and income requirements. You’ll have a better chance of qualifying (and for lower rates) if you have a good to excellent credit score (670 or above), but there are also personal loans for fair credit. You might also consider adding a creditworthy cosigner to your loan application if it helps you gain approval or secure a better APR.