Debt consolidation is when you combine multiple debts into one debt, which means that instead of making payments to separate lenders (with different interest rates), you’ll only have one payment to make. Not only does it ease the burden, but it may also get you a lower interest rate — ensuring that you pay less for having debt.

Fortunately, debt consolidation applies to any type of loan, mortgage, or credit card debt. If you have overwhelming medical bills or student loans, it may make sense to merge them into one payment each.

Benefits of Debt Consolidation

Consolidating your debt can make it more manageable in the long run. Fewer payments and less interest mean a much smaller chance of mishaps. If you have multiple lenders that require different methods and timelines for payment, it’s that much harder to keep a clean record. Debt consolidation can cut down on that time spent finagling different loan and credit provider sites. We recommend setting up auto-payments, so you never miss a deadline.

This simplified flow can translate to a better credit score, as you’re more likely to stay on track with payments. If you’re able to secure a lower interest rate, then more of your cash will go toward the principal rather than the accrued interest. As your balance gets lower, your credit utilization ratio gets better, which can also benefit your credit score.

To see how much money you could save by consolidating debt, try out this debt consolidation calculator from Bankrate. It takes into account credit card debt, student loans, auto loans, and, curiously, boat RV loans for those saddled in debt from their water transportation habits.

How Does Debt Consolidation Work?

There are many different ways to consolidate debt. Below are the most common methods for consolidating credit card debt, mortgages, and other types of loans.

Balance transfer credit card

Balance transfer credit cards were made just for credit card debt consolidation. Credit card APRs can be high — the average is currently around 15%, but it’s common to see the rates on rewards credit cards, store credit cards, and secured credit cards jump to 25%. All of this adds up when you are having trouble keeping up with payments. The good thing about balance transfer credit cards is that all of your debt gets merged into one card, so you only need to make one payment per month.

Additionally, many balance transfer credit cards come with attractive introductory offers, like 0% interest for one year. No interest gives you a whole year to pay down your balance as much as possible before the consolidated interest rate kicks in. Keep in mind, though, that if you miss a payment, the offer may be forfeited — meaning you’ll have to pay the regular APR moving forward.

Home equity loan

If you own a home, you may be able to borrow against it to pay off your debts. The equity you’d be borrowing from is the home’s value minus the outstanding mortgage — meaning, if you have a $400,000 home and your mortgage is $300,000, then you have $100,000 to borrow. If you took out $20,000 in a home equity loan, you would get a lump sum of cash that would pay off the debt in fixed monthly payments.

While this could potentially amount to a lot of money (and would offer a potentially lower interest rate than if you’d consolidated with a personal loan), it comes with more significant risks than the other debt consolidation methods listed here. Since you are using home equity as collateral, you could lose your home to foreclosure if you don’t make your loan payments. It would not be ideal, either, if you are planning on selling your home, since you would have to pay off the debt immediately and in full.

Home equity line of credit

A home equity line of credit (HELOC) is similar to a home equity loan and is sometimes used interchangeably, but there are key differences. With a home equity loan, you receive a lump sum of cash to be used for debt in fixed monthly payments until it’s fully paid off. With a HELOC, you can borrow from your equity whenever you like, up to the maximum amount available to borrow (line of credit), which makes it a more flexible option, as you can borrow multiple times at a variable rate.

A HELOC comes with the same perils that a home equity loan does. If you stop making loan payments, your house could be foreclosed on by the bank.

Personal loan

Typically, these are called debt consolidation loans. It’s a type of personal loan that can consolidate multiple types of debt into one payment and one interest rate. You may be eligible for lower interest rates than you currently have if you maintain a good credit score. Personal loans are one of the most flexible options, as it supports multiple types of debt. However, you only benefit from it if you’ve created a plan of attack for your debt and can qualify for a favorable interest rate that lets you pay off the principal faster.

Should I Consolidate My Debt?

When you should consider consolidating your debt:

  • If you have multiple high-interest loans that you haven’t had success paying down
  • If having to keep up with multiple payments per month is causing you to miss them
  • If the interest rate on the consolidated loan is lower than what you’re currently paying
  • If you have a good credit score and would qualify for the best interest rates
  • If you have a solid debt-to-income ratio

When you shouldn’t consider consolidating your debt:

  • If the interest rate on the consolidated loan is higher than what you’re currently paying
  • If you’re regularly incurring debt, and the higher balance outweighs any savings you’d see from a new consolidated loan
  • If you have a poor credit score and wouldn’t qualify for a reasonable rate
  • If your balance is small enough to pay off in under a year