Debt Consolidation

Debt consolidation summary:

• Debt consolidation combines multiple debts into a single loan to streamline monthly payments. 

• Personal loans and home equity loans are common tools for consolidating debt. 

• Debt consolidation could help you organize your debts to make paying them more manageable.

Debt consolidation definition and meaning

Debt consolidation means combining multiple debts into a new loan. You take out a new loan or line of credit and use it to pay off some or all of your outstanding debts. Then, you make regular monthly payments on the new loan until it’s paid off. Having fewer monthly payments to keep track of could make your debt feel more manageable.

Key concept: 

Debt consolidation combines multiple debts into a single loan.

More about debt consolidation 

Debt consolidation is a debt management solution that could be ideal if you have significant debt. Organizing your debt by putting several debts into one payment could reduce stress and make it easier to pay your bills. 

Several potential benefits of debt consolidation are: 

• Organize your finances 

• Reduce the number of payments you need to make

• Lower monthly payments if your new loan has a lower interest rate

• Pay off debt faster if you get a lower rate and you don’t opt for a lower payment

• Lower total interest charges if you get a lower rate and don’t extend repayment

Debt consolidation is a good option for unsecured debts. Here are a few debts that could be consolidated: 

• Credit cards

• Medical bills

• Personal loans 

Types of debt consolidation

You have several options when it comes to consolidating existing debt. 

Home equity line of credit

A HELOC lets you borrow against your home equity. This is the difference between the value of your home and the amount you owe on your mortgage. Some homeowners use a home equity loan to consolidate high-interest debt. 

A home equity line of credit (HELOC) is a line of credit secured by your home. You pledge your home as a guarantee that you'll repay the loan, just as you did if you got a mortgage to purchase your home. 

Because HELOCs are secured loans, they have lower costs and higher borrowing limits compared to other borrowing options.

Personal loan

A personal loan lets you borrow a lump sum of money and could also be used to consolidate debt. Most personal loans are unsecured debt. Some people use the funds from a personal loan to consolidate and pay off existing debts. 

You don’t need to borrow against a home or any other valuable item for an unsecured personal loan.

Balance transfer

A balance transfer lets you move an existing credit card balance to another credit card, usually for a fee. Many balance transfer credit cards offer 0% interest for a set time, typically 6 to 18 months. If you don’t pay off the balance in that time, you’ll pay the card’s regular APR on the remaining balance until you pay it off. Credit cards tend to be one of the most expensive ways to borrow.