Debt Consolidation Guide

| Updated on March 26, 2024

A flurry of bills comes in each month, all with varying payments, due dates, and rates. It’s all become a bit much.

Consolidation can slash the number of payments and rates you must concern yourself with, making your monthly obligations way more manageable. There are several ways to consolidate, though, so if you decide the strategy is for you, you should choose wisely. Here’s a debt consolidation guide to help you.

What is Debt Consolidation?

Debt consolidation is an approach that involves rolling your unsecured debts into a new loan with a single payment at a lower rate, which will save you money, allow you to pay off your debts faster, and generally streamline monthly bill paying.

You’ll need good-to-excellent credit here, though. Yes, you might be able to get a loan with subpar credit scores, but your rates likely won’t be lower than what you’re dealing with now. That offsets the benefits of consolidation and could cost you more money overall.

Ways to Consolidate Debt

There is a variety of ways you can consolidate debt. Choose the one that best suits your situation.

Balance Transfer Card

Credit card companies occasionally issue what are known as zero-percent balance transfer cards. You can shift your higher-interest debt onto one, then pay it off before the rate goes up, in a year-and-a-half or so. Otherwise, you could wind up paying more interest than you began with.

Note that you likely must pay a fee of three to five percent of the amount transferred, in addition to your balance. There will also be a hard pull on your credit report.

Consolidation Loan

This may be a good way to consolidate – if you’re eligible for sufficient funds to cover your obligations, a lower rate, and manageable repayment terms. You generally must have a credit score that’s in the mid-600s, at least, plus a history of on-time payments. Again, you might be able to get a loan with lesser credit, but it may not be worth it.

Understand, too, that there may be fees for origination, late payments, and early loan payoff.

Home Equity Line of Credit

If you own your home, you can use the equity you’ve built up in it to help you with your debt. Equity is the difference between your mortgage balance and your home’s appraised value.

A home equity line of credit (HELOC) provides you with a credit line from which you can draw at a variable rate that will usually be lower than credit cards or personal loans. Plus, you can often get a larger loan amount.

Note that loan interest is not tax-deductible, and you can lose your property if you fail to make payments and default on your loan. Your home will serve as loan collateral.

You can use a HELOC calculator tool to see how much you can borrow and to calculate your likely HELOC payment. Here’s the best HELOC calculator tool. In addition to your equity, the amount you can borrow depends on your credit score and income.

Peer-to-Peer Loan

These lending platforms match borrowers with individual investors for unsecured loans that usually range between $25,000 and $50,000. Because such loans are unsecured, terms, rates, fees, and borrowing limits will be determined largely by your credit history.

Note that there may be fees and that you’ll have less time for repayment than you would with a home equity loan or credit card, making your monthly payments higher. Your rate will also likely be higher than what you’d get with a home equity loan.

With this debt consolidation guide, you’re able to see the differences between the ways you could pay off your debts with a single monthly payment. Assess your personal situation, then choose wisely.

John M. Flood

John is a crypto enthusiast, Fintech writer, and stock trader. His writings provide guides to perform your best in the crypto world and stock planet. He is a B-Tech graduate from Stanford University and also holds a certification in creative writing. John also has 5 years of experience in exploring and understanding better about the FinTech industry. Over time, he gained experience and expertise by implementing his customized strategies to play in the crypto market.

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