Part of what can seem unmanageable when you’re dealing with debt is juggling a number of different accounts. Trying to keep up on all of them while putting emphasis on resolving the most important ones can be a difficult task. Debt consolidation aims to alleviate some of that and simplify paying down debts. There are several methods of debt consolidation. Find out if any of them seem right for you.

Debt Consolidation Meaning

Debt consolidation is the process of combining multiple sources of debt into a new, single, more easily manageable account. 


This usually involves either taking out a loan to repay existing debts (leaving you with the larger new one) or transferring balances of existing debt accounts. The goal of debt consolidation can vary, but generally involves lowering interest rates (and therefore overall cost), extending repayment timelines, or making debts less complicated by moving them to a centralized account for repayment.

How Does Debt Consolidation Work?

Like we mentioned above, debt consolidation aims to take many accounts and merge them into a single account to manage and pay to.  We’ll get into specific methods below, but in general, to consolidate debt you’d handle them in one of two ways depending on the type and amount of debt you’re in.

  1. Take out a loan to repay existing debts, leaving you with only the new loan to repay. The goal, of course, is to secure comfortable rates and terms on the new loan.
  2. Transfer revolving credit balances to a single account. You may be able to transfer credit balances to a new account with a lower interest rate (or even 0% interest for a time in some cases).

Consolidating Secured vs. Unsecured Debt

One essential thing you should keep top of mind when looking into debt consolidation is the type of debt that you’re in. Are you consolidating secured debts, backed by collateral such as a house or car, or are you consolidating unsecured debts such as credit cards?


You generally want to avoid converting unsecured debt into secured debts. The reason for this is because in the event you are unable to keep up with payments, the collateral can be repossessed. 


For example, if you are drowning in credit card debt and you consolidate this into a loan with your home as collateral – you’d be putting your house at stake for the credit card debt when it wasn’t before. 


In some instances, consolidating debt also consolidates the risks associated with them.

Pros & Cons of Debt Consolidation

As with any financial decision, you’re faced with pros and cons when it comes to consolidating debts. Ultimately, it will depend on your individual circumstances and having a solid plan to handle the consolidated debt as effectively as possible.


Here are some general advantages and disadvantages of debt consolidation to keep in mind while you’re researching.

Potentially lower interest ratesYou’ll generally be in debt longer (there are exceptions to this depending on your goal of consolidating)
Lower total cost over timeYou’re not actually getting rid of any debts, just rearranging them
Simplify and reduce debt accountsSome methods may be difficult depending on your credit
Set a simple fixed payment scheduleConsolidation doesn’t change bad financial habits
Credit score will improve if you keep up on the new payments and keep credit utilization lowAdditional fees and upfront costs

Debt Consolidation Methods

There are many techniques for consolidating debt – some of them you can do on your own, while others require a debt consolidation company or special lender program. 


We recommend continuing your research and seeing what you can DIY before jumping to a third party company. Oftentimes being honest with yourself, making a plan, and addressing bad habits is the better solution.

Personal Loans for Debt Consolidation

Taking out a personal loan for the purpose of consolidating debts is one option that you can consider doing yourself to some degree. However, there are plenty of conditions that must be met and things to keep in mind when determining if this is the right route to take.


First, you’ll need to see what type of personal loan you can qualify for. Personal loans can be either secured or unsecured. Unsecured personal loans are of course more difficult to qualify for because you don’t have any form of collateral to support the debt. If you have excessive debt and aren’t in exceptional credit standing, you may find difficulty in getting approved.


Then, you’ll have to ensure the rates and terms that you qualify for in a personal loan are actually an improvement to the debt you’re currently facing.

  • How do interest rates compare?
  • What’s the difference in your total interest due?
  • Will you have a longer or shorter loan term than each of your existing debts?
  • How do collateral or other risk factors change?

Debt Consolidation Through Your Home Equity

Your home’s equity can also be a tool used to consolidate debt. This, of course, does put your home at risk if you’re not able to make your payments. So be sure to proceed with caution when considering tapping into your home’s equity for debt consolidation.


There are two ways that you can leverage the equity of your house:


Home Equity Loans – Usually the better approach in terms of debt consolidation, home equity loans allow you to receive a lump sum from a second mortgage on your home. Home equity loans generally have lower interest rates compared to some other means of debt consolidation loans.

HELOC (Home Equity Line of Credit) – Unlike home equity loans, HELOCs do not come in the form of a lump sum, but rather as a form of revolving credit. The difference between a HELOC and a normal revolving credit line is that your home is collateral in a HELOC and can be repossessed if you default on payments. For the purposes of debt consolidation, HELOCs are less helpful because they do not come in a lump sum. However, they can be beneficial if you are anticipating upcoming expenses that your income alone won’t cover.

Credit Card Balance Transfers

Another method of debt consolidation that is applicable to revolving credit is a credit card balance transfer (AKA credit card refinancing). The idea of a balance transfer is to move debt from a higher-interest account to a lower- or zero-interest account. 


Many companies offer 0% balance transfers that feature a limited time 0% interest period that could give you a nice head start on repaying your debts interest-free.


However, you need to ensure that you’ll actually save money on a balance transfer by comparing your interest savings to any fees you’d pay for moving the balance.

Tapping into Your Savings or Retirement

Savings accounts and especially retirement funds should try to be avoided when repaying debts. But, sometimes they could be the right answer to give you a boost out of the debt you’ve fallen into without any costly loans or balance transfers.


Savings accounts should be considered first before borrowing against your retirement funds such as a 401K or an IRA. Borrowing against your retirement funds early can mean hefty fees and the opportunity cost of losing your investments can be huge.


The key to any debt repayment is to change what put you into debt in the first place. If you do tap into your savings for repaying debts, it should be a one-time thing. 


If your debt is due to circumstances that were beyond your control, it may be the boost you need to get back on track. However, if your debt was due to poor financial habits, the best thing you can do is be honest with yourself and work to establish money-healthy routines so you can avoid debt in the future.

Consolidating Different Kinds of Debt

Different types of debts may require different actions to most effectively consolidate and ultimately resolve. Two very common debts that people look to consolidate are debts from credit cards and debts from student loans.

How to Consolidate Credit Card Debt

Consolidating credit card debt is often done through a balance transfer or loan. Both methods can be effective ways to rid yourself of credit card debt. The key is looking at the before & after to see how much of an advantage you truly get through your debt consolidation efforts.


Before looking into methods for consolidating:

  • Are you prioritizing your credit card debts effectively?
  • Have you reviewed your spending history to identify areas to improve?
  • Have you compared your credit utilization to your budget?
  • Are there any cash back programs you’re not leveraging?

How to Consolidate Student Loan Debt

Student loan debt consolidation has two primary options, which have different processes and advantages.

Federal Student Loan Consolidation

Through the Department of Education, student loan consolidation consists of simply merging multiple loans into a single loan. These consolidation programs will not change your interest rate, however you may have the option to change your payment schedule. 


Higher payments would allow you to repay the debt sooner, while lower payments would extend your term and increase your total interest.

Private Student Loan Refinancing

Consolidation through a private lender for student loans is most commonly referred to as student loan refinancing. These programs can be more difficult to qualify for than Federal programs.


One advantage of refinancing student loans through a private lender is the opportunity to lower your interest rates and save money over the term of your loan. However, similar to balance transfers, be sure that your savings in interest and other benefits outweigh any fees or upfront costs of refinancing.

Consolidating Debt with Bad Credit

If you are struggling with bad credit, you may have more limited options when it comes to consolidating debt. Personal loans, balance transfers, and even secured home equity loans can be challenging to get approved for without good credit. If you do get approved, interest rates will often be higher – cutting into the benefits of consolidating debt in the first place.


With damaged credit especially, it’s crucial to weigh your options before committing to anything. Reviewing your budget and spending habits should be the first step. Try to do as much as you can on your own to resolve your debts. You may be surprised where you “find money” after reviewing your spending and making adjustments.


Once you’ve optimized your budget and spending, take a look at how well you’ll be able to manage your debts. You may have to separate and prioritize debts to consolidate only the most impactful ones, while maintaining others as-is.

How Does Debt Consolidation Affect Your Credit?

Much like any financing situation, debt consolidation could be great… or terrible for your credit. It all depends on how you handle it and how well you plan out how to manage debts and your finances long-term.


In the short-term, you’ll probably see your credit score drop. This is expected if you have any recent hard inquiries for a loan or opening a new credit line. It’s likely that your credit score has already been on a decline if you’re carrying large balances, high credit utilization, or have failed to make payments. 


If handled properly, debt consolidation can be great for your credit. 

  • Consolidating credit card debt will lower utilization
  • Avoid negative payment history across multiple accounts
  • New account(s) will add to your credit mix
  • Positive payment history to your consolidation loan over time

Is Debt Consolidation Worth it?

As with all forms of debt relief, we recommend avoiding the process of debt consolidation if possible by learning to effectively handle your spending and finances before encountering excessive debt. However, sometimes we encounter financial surprises or make mistakes that end up being costly. For some, debt consolidation can be the needed boost to get things back on track. 


The determining factor of whether or not debt consolidation is worth it, is how well you are able to handle your finances after consolidating. 


If you have solid answers to these four questions and feel that consolidating debt could help you based on the research you’ve done, then it may be worth it.

  1. How much will debt consolidation save you overall considering interest rates, term length, total interest paid, and any fees?
  2. Will restructuring and simplifying your debts truly allow you to better manage them?
  3. Have you reviewed your budget and spending to make any needed adjustments now?
  4. Do you know what caused your debt and how to better handle your finances to avoid it in the future?