How Does Debt Consolidation Work?

Debt consolidation is the process of taking out a single new loan or balance transfer credit card and using the funds to pay for multiple existing debts. You can consolidate your debt with the help of a professional team or on your own.

A professional debt consolidation company can help you identify the best strategy and loan options for the types of debt you carry, saving you headaches throughout the process. These companies can help you learn how to payoff debt in the fastest and quickest option for you. Alternatively, you can take on this research and planning yourself and open a loan or credit card directly.

Is Debt Consolidation A Good Idea?

For many people, the answer is yes. Debt consolidation can be a good way to simplify or lessen your financial burdens in a few different ways:

• You won't have to manage as many bill payments per month. By consolidating multiple of your debts into one bill, you only have to think about paying that one bill each month rather than tracking the different "due by" dates for every individual one.


• You might be able reduce how much you have to pay on interest in the long-term. When deciding which debts to consolidate, compare the APR (annual percentage rate, or how much it costs you to borrow money per year) for each of your current debts with the quoted APR for a new debt consolidation loan. Consolidating high-interest rate debts into a single lower interest rate loan can help you get out of debt quicker, simply because the creditor is charging you less interest for how much you've borrowed. It should be noted that your available options may be determined by your credit score. It is recommended to be mindful if you have a bad or low credit score to check the lenders' requirements and terms.


• You might reduce how much money you have to pay each month. While it's smart to pay down your debt as quickly as possible, life happens. If you consoldiate your debt into a single loan, instead of making multiple payments to different creditors each month, you only need to pay one. Depending on the loan's terms and conditions, this can be less than the total of every other payment you were making before.

Unlike debt settlement, debt consolidation doesn't promise to reduce your total current debt, but it does offer you a way to make your financial life simpler. It's also a less risky strategy; debt settlement requires you to stop paying your bills so the company can negotiate with your creditors and "settle" your debt for less, which can cause a significant hit to your credit score.

While completing the final application for a debt consolidation loan will briefly hurt your credit for a few points—the lender will run a hard credit check after you've pre-qualified and want to continue the application—as long as you make payments, your credit should recover in a few months.

Secured vs. Unsecured Debts

Debt settlement companies typically only work with unsecured debts (like medical bills, personal loans and credit cards). Be sure to read through our articles to learn how to get out of debt through debt consolidation. Secured debts—those backed by collateral, like car loans and home mortgages—can sometimes qualify for debt consolidation strategies but generally won’t qualify for debt settlement strategies.

Disclaimers

Credible

¹ Prequalified rates are based on the information you provide and a soft credit inquiry. Receiving prequalified rates does not guarantee that the Lender will extend you an offer of credit. You are not yet approved for a loan or a specific rate. All credit decisions, including loan approval, if any, are determined by Lenders, in their sole discretion. Rates and terms are subject to change without notice. Rates from Lenders may differ from prequalified rates due to factors which may include, but are not limited to: (i) changes in your personal credit circumstances; (ii) additional information in your hard credit pull and/or additional information you provide (or are unable to provide) to the Lender during the underwriting process; and/or (iii) changes in APRs (e.g., an increase in the rate index between the time of prequalification and the time of application or loan closing. (Or, if the loan option is a variable rate loan, then the interest rate index used to set the APR is subject to increases or decreases at any time). Lenders reserve the right to change or withdraw the prequalified rates at any time.

² Requesting prequalified rates on Credible is free. However, closing a loan will result in costs to you.