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Managing several debts can be difficult. Each account may have its own payment, interest rate, due date, and fees. Missing a payment can add extra costs and make the debt harder to manage.<\/p>\n
Debt consolidation lets you manage several debts through one loan, credit account, or payment plan. You then make one payment instead of paying several creditors.<\/p>\n
Debt consolidation does not erase what you owe. The old balances are paid with new credit or moved into a new repayment plan. Whether it saves money depends on the new interest rate, fees, loan term, and whether you avoid adding more debt.<\/p>\n
Debt consolidation is the process of combining two or more debts into a single payment.<\/p>\n
For example, a borrower may have balances on three credit cards. A debt consolidation loan could be used to pay those card balances. The borrower would then repay the new loan through scheduled monthly installments.<\/p>\n
Debt consolidation is commonly used for unsecured debts such as:<\/p>\n
Not every debt can or should be consolidated. Mortgages, car loans, tax debt, and federal student loans may have special rules or protections. Before replacing any debt, check whether you could lose those benefits.<\/p>\n
The exact process depends on the consolidation method, but it usually follows several basic steps.<\/p>\n
First, the borrower lists the debts that may be included. This list should show each balance, interest rate, minimum payment, and remaining repayment period.<\/p>\n
The borrower then applies for a new loan or credit account. Another option is to contact a credit counselor. A lender may check income, credit history, and monthly debt payments. It uses this information to decide whether to approve the loan.<\/p>\n
If the borrower receives a debt consolidation loan, the lender may send the funds to the borrower or pay the listed creditors directly. Once the old balances have been paid, the borrower begins making payments on the new loan.<\/p>\n
Keep checking the old accounts until each balance reaches zero. A pending payment, extra interest, or a processing delay may leave a small balance.<\/p>\n
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Debt consolidation is not a single financial product. Several methods may be used, and each has different costs and risks. The Consumer Financial Protection Bureau\u2019s debt consolidation guidance<\/a> explains several factors consumers should review before choosing an option.<\/p>\n A personal loan may provide a lump sum that is used to pay several existing debts. The borrower then repays the loan through fixed monthly payments over a defined term.<\/p>\n An installment loan can make repayment easier to plan. Its payment schedule and payoff date are usually set when the loan begins. An origination fee or a longer loan term may reduce the savings.<\/p>\n A lower monthly payment does not always mean a better offer. The payment may be lower because the loan has a longer term. As a result, you may pay more interest overall.<\/p>\n A balance transfer allows a borrower to move one or more credit card balances to another card. The new card may offer a low or promotional interest rate for a limited period.<\/p>\n This approach may work well when the borrower can repay most or all of the transferred balance before the promotional period ends. It may be less helpful when the borrower needs several years to repay the debt.<\/p>\n Include any balance transfer fee when comparing costs. Also check the APR that will apply after the promotional period ends.<\/p>\n A homeowner may be able to borrow against home equity and use the money to pay unsecured debts.<\/p>\n These products may offer lower interest rates than some unsecured loans. However, they convert unsecured debt into debt secured by the home. If the borrower cannot make the required payments, the property may be at risk.<\/p>\n Closing costs, variable rates, repayment structure, and the loss of available home equity should also be considered.<\/p>\nPersonal Debt Consolidation Loan<\/h3>\n
Balance Transfer Credit Card<\/h3>\n
Home Equity Loan or Line of Credit<\/h3>\n
Debt Management Plan<\/h3>\n
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