17 Things You Should Know About Debt Consolidation

There are several ways to make debt consolidation work for you
Updated May 1, 2024
Fact checked
Woman stressed holding credit cards

We receive compensation from the products and services mentioned in this story, but the opinions are the author's own. Compensation may impact where offers appear. We have not included all available products or offers. Learn more about how we make money and our editorial policies.

If you’re in over your head, wondering how to pay off debt and feeling like most people can’t relate, consider this: over 30% of Americans' monthly income is going toward paying off non-mortgage debt, according to a study by Northwestern Mutual.

As debt grows and becomes something nearly everyone has and is struggling to get rid of, debt consolidation is being considered more readily. But there are some key things to know about combining your loans before you get started. If you’re considering it for yourself, here are 17 important things to know before taking action.

You can do it yourself

nyul/Adobe bearded man working online with laptop computer

It might sound complicated, but you can actually DIY your debt consolidation, depending on your situation. There are many options to merge your debt without needing a financial professional. That means debt consolidation can be very affordable with little to no fees. You’ll learn more about many of these options as you read this list.

You can enlist someone to help you consolidate

pressmaster/Adobe Man working from home

If you don’t want to take on the endeavor by yourself, there are companies that will assist you. Top debt consolidation companies can help you when the total amount you owe is unmanageable. If you choose to hire someone or enroll in a program, be conscientious of how the process works and any fees that may be associated.

You can have one monthly payment instead of multiple

Krakenimages.com/Adobe Woman working on computer

Are you tired of managing multiple payments each month? Have you ever accidentally missed one or paid it late? When you consolidate your debt, you’ll be making your payment situation more manageable. The basic concept of consolidation is to gather your debts and roll them into one monthly payment instead of multiple.

You can consolidate debt with personal loans

digitalskillet1/Adobe Woman looking at computer

As odd as it may sound, taking out a personal loan to pay off existing debt is one of the most common ways to consolidate debt. Once you’ve found a lender, you’ll pay off your existing loans and credit cards until the balance is zero. Because you don’t owe anymore on those loans or credit cards, you’ll be left with one monthly payment on the personal loan.

There’s no guarantee you’ll get a lower interest rate

Prostock-studio/Adobe Worried man looking at computer

When you consolidate your debt, you’re not guaranteed to get a lower interest rate. Some lenders will calculate the weighted average of your existing debt and offer you that rate for a new loan. With this strategy, the bank won’t lose out on any money they’re owed, and you can have your debt in one place. You might get lucky by qualifying for a lower interest rate, but there’s no guarantee it will happen.

If you have good credit, you could negotiate a better rate

Andrey Popov/Adobe Woman checking credit score

Even though there’s no guarantee you’ll get a lower rate when you consolidate, you can try to negotiate a lower rate if you have good credit. And there are some simple things you can do to help boost your credit. It is important to remember that just because you have debt, that doesn’t mean your credit score is low. Between student loans and some credit card debt, I owe approximately $30,000 before I’m debt-free, and my score is in the 740-760 range. You might even ask your credit card company if you qualify for a lower interest rate as an option.

Your monthly payment could be lower

goodluz/Adobe man working at computer

Another benefit of debt consolidation is walking away with a lower monthly payment. This is great if you were struggling to get out of debt before. With lower monthly payments, you can start saving for an emergency fund or make larger payments toward your debt.

The total amount you pay might increase

fizkes/Adobe Annoyed woman looks at computer

The flipside of having a lower monthly payment could be that you’ll pay more money in the long run. When you consolidate, the length of your repayment may be longer than it was before consolidation. This means there’s more time for interest to accrue even if it is at a lower rate. You’ll want to calculate the total amount you’ll repay to make sure it’s the best decision for you.

Here’s an example to give you an idea of why a lower monthly payment and lower interest rate might not work in your favor. Let’s say you owe a total $10,000 with an average interest rate of 20% with 3 years left until your last payment would be made. You decide to consolidate them into one loan with a 15% interest rate and repayment period of 5 years. Your monthly payment just got about $130 lower, but you’re going to pay back an additional $900 before you’re debt-free.

Don’t let origination fees surprise you

insta_photos/Adobe Woman working on computer

When you borrow money, the loan usually has an origination fee tied to it. That fee is most often taken from the total amount of the loan, so you never get the full amount that you borrow. When you talk with your lender, make sure you understand the amount of your loan you will be receiving. You don’t want to be caught off guard when you borrow $10,000 and don’t get the entire amount. In most cases, you’ll need to borrow more than your total debt amount to cover the origination fee and be able to close out your other lines of debt.

Unsecured and secured loans aren’t the same thing

mavoimages/Adobee Couple on computer

A secured loan is a type of loan that has collateral or something tangible attached to it. For example, a mortgage is a type of secured loan because a lender can reclaim your home if you aren’t making payments. An unsecured loan does not have any collateral, and personal loans are a type of unsecured loan. With no collateral, unsecured loans do have slightly higher interest rates. You can opt to get a secured loan to consolidate your debt, but doing so risks losing a valuable item if you can’t make payments. Understanding the differences before taking action is important.

Transferring your balance to another credit card can benefit you

insta_photos/Adobe Man at computer

Similar to borrowing a personal loan, credit card consolidation may not be something you’ve already considered to pay down debt. But if you have a manageable amount of debt that can be paid off in a year or two with regular payments, it could be the best option of consolidation for you.

A few years ago, I had a credit card that I wasn’t able to pay down quickly because the interest was higher than I could properly manage. I found a new card that offered an introductory 0% APR for 18 months. I was able to transfer my balance to the new card and make payments without accruing any interest and paid off the amount before the introductory period was over.

In my case, I did pay a 3% balance transfer fee, which is common among these cards, but that was far less than the interest I would have paid on the other card. It's a good idea to explore the best low interest credit cards available. Some cards offer free balance transfer as part of the introductory period but won’t offer a 0% APR. You can usually find a credit card that offers a low APR to start you off.

Consider multiple lenders

Prostock-studio/Adobe Woman smiling at laptop

Choosing a lender or credit card is similar to looking around for the best deals when you shop on home, clothing, or grocery items. Different institutions will offer you different interest rates on personal loans based on your credit history and other factors. It’s in your best interest to do your research to find the lowest rate you can find. There’s no rule saying all your banking and borrowing needs to be handled at one financial institution.

Your credit score will be impacted

deagreez/Adobe Man working on computer

When consolidating debt, you’ll notice some fluctuation in your credit score. If you’re borrowing a personal loan, you might notice it drop a bit because of the hard inquiry on your credit report. However, it should bounce back pretty quickly as you make on-time payments. The longer you make payments, the higher you’ll see your credit score rise. If you decide to open a new credit card and merge your credit card debt to one card, you might see an immediate spike when your credit availability increases. Overall, as you get closer to paying off your debt, you should see a positive impact on your credit score.

You might shorten the life of your loans

Africa Studio/Adobe Woman using laptop

Depending on the length of repayment on your existing debt, you could shorten the overall time until you’re debt free. If you have a loan that still has a repayment period of 10 years, you could pay that off in as few as five years when you consolidate it with other debts. Your monthly payment may be a little higher, but if you can afford it, isn’t it worth having no debt?

It won’t change your spending habits

BGStock72/Adobe Happy friends shopping

Debt consolidation is like applying aloe vera to a sunburn. You’re only treating the symptom that caused your debt. Your spending habits are the root cause, and that won’t change when you consolidate. You need to make a commitment to good spending habits to pay off your debt and avoid creating more for yourself. If you’re always broke and not sure why, getting to the root cause during your debt repayment process can help you financial future.

Debt consolidation is NOT the same as debt settlement

Wayhome Studio/Adobe Stressed couple looking at paperwork

If someone has told you these two debt management methods are the same, they’re wrong, plain and simple. Debt settlement is when you negotiate with your lender to pay less than you owe, usually in a lump sum. It can eliminate your debt quickly but will have longer lasting effects on your credit. To even be eligible to attempt to settle your debt this way, you’ll need to be delinquent on the payments for that account. Lenders are never required to settle with you, so you could be racking up even more debt through late fees and additional interest than you had in the beginning.

Debt consolidation isn’t right for everyone

F/Adobe stressed man looking at bills

Debt consolidation can be an excellent tool for getting out of debt, but if you have trouble making your monthly payments after consolidating, it may do more harm than good in the long run. In addition, if you have bad credit, it can be difficult to secure a loan or qualify for a balance transfer card with lower interest rates. At that point, bankruptcy may be an option to consider as a last resort when debt consolidation or debt settlement won’t help. 

National Debt Relief Benefits

  • No upfront fees1
  • One-on-one evaluation with a debt counseling expert
  • For people with $30,000 in unsecured debts and up

Author Details

Lauren Stewart Lauren Stewart is a freelance writer and personal coach. Get to know her!

Want to learn how to make an extra $200?

Get proven ways to earn extra cash from your phone, computer, & more with Extra.

You will receive emails from FinanceBuzz.com. Unsubscribe at any time. Privacy Policy

  • Vetted side hustles
  • Exclusive offers to save money daily
  • Expert tips to help manage and escape debt