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What is Debt Consolidation?

Debt consolidation occurs when you compile all of your existing debts and obligations into one solid debt account. This merging of each financial obligation such as credit cards, bank loans, or other accounts allows you to make one monthly payment versus keeping track of a multitude of due dates, payment amounts, and lenders.

Common debts that are paid off using debt consolidation include the following:

Using this lower cost method to resolve your debts will not only shave a few interest points off of your monthly payments, but it will also allow you to save a few bucks in the process. The additional money can be used towards adding extra to your budget or savings goals while you are paying off your existing loan. 

How Does Debt Consolidation Work?

Debt consolidation works in much of the same process that you would typically use in order to refinance a student loan or a home mortgage. However, with consolidation you would be adding several debts into the equation versus one or two. The funds from the new, larger loan are then used to pay off the collections and debts in bulk versus one at a time. 

In addition to resolving the balances you will experience many benefits. These may include raising your credit scores, cutting back on your spending, lowering the amount of derogatory accounts in your name as well as reducing the overall interest rates by up to 10% or more in some cases. Once you have paid off your obligations with a debt consolidation loan, you may qualify for better terms or rates when you apply for credit in the future.

Ways to Consolidate Your Debt?

When considering how to consolidate your debt there are several options to consider while weighing the pros and cons of each method. Choosing the best one requires research to determine the best one when evaluating loan amounts, repayment terms, and interest rates. 

Debt consolidation loan (personal loans)

Debt consolidation loans provide an avenue for you to finance as much as $100,000 in some cases in order to cancel out your debts. As a type of personal loan, they are easier to get approved for with standardized banks or financial institutions as they allow terms of five to ten years with soft credit inquiries that won’t damage your credit.

When non-traditional banks aren’t an option due to limited resources or other factors, then online institutions have many options for qualifying applicants with the added benefit of selecting from multiple lenders. 

Balance transfer card

Credit cards known as balance transfer cards come with special conditions that allow you to take a portion or all of the balances of your existing cards and apply them to the new card. Many balance transfer cards include teaser rates which help ease the transition from several high interest cards to one lower interest card. This can save thousands of dollars over the duration of the repayment process. 

During the introductory period which can last up to the first twenty four months on some cards, any debts that need to be consolidated using this method are nearly interest free due to the extremely competitive annual percentage rates. 

As long as you have the ability to repay the debts within a certain time frame then you can avoid the trap of returning to a high interest debt cycle once the rates return to normal. 

Student loan refinancing

Student loan refinancing is a process that allows you to take your existing federally backed or privately secured loans and consolidate them into a single payment each month. By refinancing this type of debt , you are able to save tens of thousands of interest paid over the course of a ten or twenty year loan. 

Refinancing student loan debt does have several benefits however, federal regulations do limit the original protections that accompany your original loan such as deferment and income based repayment terms.

Home equity loans

Home equity loans are used to access the equity or available cash value that has been built up from your mortgage payments. The loan terms with a home equity loan or second mortgage as they are known usually allow for repaying the proceeds anywhere from five years at a minimum to thirty years at the maximum. 

These second mortgages tap into your home’s value while lending you as much as 85 percent of the appraised value to borrow in order to pay down your debts. The proceeds are collateralized by your home, which can only be foreclosed upon if there is a default. 

Cash out mortgage refinancing

Cash out mortgage refinancing is an option that is taken in order to refinance your existing home mortgage. By receiving a loan that is in excess of the remaining principal owed, you can withdraw or “cash out” the balance for purposes such as debt repayment.

These collective debts including the mortgage and debt accounts are consolidated into a new mortgage thus eliminating the need for multiple payments.

Pros and Cons of Consolidating Your Debt

Debt consolidation may be a convenient move for those who wish to eliminate their debts without the hassles of juggling payments, collection calls, and a multitude of due dates. However, it is important to note that for people who have encountered unhealthy financial habits, this method may cause greater harm to your credit and financial picture. 

Consider the following points when deciding if debt consolidation is the best option for you:


  • Positive credit outlook – Once a debt consolidation is reported your initial credit score may drop. However, as on-time payments are made and accounts begin to zero out, your credit score may improve drastically over the upcoming months. 
  • Savings on interest – High profile debt is usually accompanied by less desirable interest rates. These can quickly add up to hundreds of extra dollars spent each year without lowering the principal. By consolidating multiple accounts into one solid loan, the interest all but vanishes while providing you an avenue to pay down your debt faster.
  • Better debt management – Managing a variety of debt accounts can be difficult if you aren’t very adept in budgeting or planning. The consolidation process allows you to keep your finances on track while not digging yourself into a financial hole.


  • Origination Fees – Applying for a consolidation loan is unlike the getting approved for a traditional type of loan. Many lenders charge fees accompanied with starting, maintaining, or processing the proceeds of the actual loan. 
  • Collateral damage – Secure loans involving equity or mortgage refinancing often require property to be collateralized in order to acquire approval. If the loan isn’t fully repaid on the original terms then any assets you put up can be forfeited. 
  • Higher costs over time – The main benefit of debt consolidation is the ability to repay existing debts at a lower interest rate with smaller payments. In some cases loans are stretched to a maximum time frame to accommodate smaller payments which end up costing more in the long run.

Is Debt Consolidation a Good Idea?

Debt consolidation is a good idea if you would like to get a better handle on your finances, learn how to budget, and improve your credit profile. Some of the following factors should be considered when making a decision: 

  • How much debt you are able to repay
  • The length of time that you will need to use consolidation
  • The longevity of your financial health to ensure avoidance of a default
  • Whether your credit has risen recently
  • Your relationship with money overall
  • Whether you can commit to a solid repayment method
  • How committed you are to staying away from additional debt accumulation

Consolidation of your debts can be a serious undertaking that can have benefits as well as unintended consequences. As you embark on your debt repayment journey be sure to choose terms that work for you, improve your score, and keep your finances where they belong. 


Do consolidation loans hurt your credit score?

Overall consolidation loans improve your score over time. The immediate opening of a loan will have a negative signal via a hard inquiry to creditors due to the large balance but the negative credit impact is temporary and resolves within just a few months. 

What is the difference between debt consolidation and credit card refinance?

Debt consolidation requires you to take out an actual loan via various methods that have to be rapid with specific terms. Credit card refinancing is more of a strategy to acquire a card with a lower interest rate long term. 

Can I still use my credit card after debt consolidation?

Technically you can still use any of your credit cards after debt consolidation however, you should keep in mind that it is not recommended as it could increase your debts at a time when your overall goal is to lower them. 

How long does debt consolidation take?

The process of debt consolidation can take anywhere between three and five years. However, every case is unique based on your financial situation, therefore the process can be shorter or longer in certain cases.

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