What debt consolidation is and the main ways to do it
When you owe money on several accounts at once, each with its own due date, minimum payment, and interest rate, keeping up takes constant attention. Missing a date on any one of them brings a late fee and more interest, and the situation gets harder to manage each month. This page explains how each consolidation method works, which kinds of debt can be combined, and where on this site to find the details for your specific situation.
Debt consolidation means bringing those separate debts together so you make one payment each month. There are two basic ways to do it. You can borrow new money at a lower interest rate and use it to pay off the old accounts, or you can place your accounts into a single managed repayment plan through a nonprofit agency without borrowing anything new.
One thing consolidation does not do is reduce the amount you owe. On the day you consolidate, the total is the same as it was the day before. What changes is the interest rate, the number of payments you have to track, or both, and those changes can lower the total cost over time and make the payments easier to keep up with.
- TIP: Consolidation works when the new arrangement genuinely costs less than the old one and when new balances do not build back up on the accounts you paid off. Be wary of fraudulent offers and always compare the full cost of any option, including fees, against what you pay now before you commit to it.
How consolidation differs from debt settlement
These two terms get confused constantly, and some companies encourage the confusion. With consolidation, every creditor is paid the full amount owed, under better terms. With settlement, the goal is to pay creditors less than the full amount, usually after payments have stopped, and your credit is damaged while the accounts sit unpaid. The Consumer Financial Protection Bureau has a plain comparison of credit counseling, debt settlement, debt consolidation, and credit repair (see: https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-credit-counseling-and-debt-settlement-debt-consolidation-or-credit-repair-en-1449/) that is worth reading before you sign up for anything.
Before working with any company that advertises consolidation, have them confirm in writing whether each of your creditors will receive the full balance owed. If the plan involves paying less than the full balance, it is a settlement program, whatever name the company gives it. If you are weighing those two paths against each other, the NHPB comparison of debt settlement compared to debt consolidation - which is the right option goes through the differences in detail.
The main ways to consolidate debt
Four methods cover nearly every situation. Each one fits a different financial position, and each has its own full guide on this site.
A debt consolidation loan. You take out a personal loan from a bank, a credit union, or an online lender, use the money to pay off your separate accounts, and then repay the one loan in fixed monthly installments. This works when you can qualify for an interest rate lower than what your debts carry now, which depends on your credit standing and income. Watch for origination fees, and for repayment periods so long that the total cost ends up higher even at a lower rate. The NHPB guide to using a loan to consolidate unpaid debt explains the process, and because terms differ so much from one lender to the next, it helps to review the NHPB page on comparing debt consolidation loan offers before applying anywhere.
A balance transfer to a card with a low or zero percent promotional rate. This method is mostly for credit card debt. You move balances onto a new card that charges no interest for a set number of months, so every payment during that window goes to the balance itself. A transfer fee usually applies, the promotional period eventually ends, and approval generally takes good credit. The fees, the timing, and the mistakes that can turn a transfer into a setback are covered in the NHPB guide to using zero percent balance transfer credit cards, and current offers can be reviewed on the NHPB page about comparing all types of credit card offers.
A home equity loan or line of credit. Homeowners with enough equity can borrow against the home at rates below almost any other form of consumer credit, then pay off their other debts with the money. The house secures the loan, and the house is exactly what is at risk if the payments stop, so this method carries the most serious consequences of any on this page. The NHPB guide to pros and cons of using a home equity loan or HELOC to consolidate debt covers qualifying, the process, and the risk in full.
A debt management plan through a nonprofit credit counseling agency. This is the one method that requires no new borrowing and no minimum credit score. You send the agency one payment a month, and the agency pays each of your creditors from it under terms it has arranged, which often include reduced interest rates and waived fees. Plans usually run for several years, and the credit cards in the plan are generally closed while it is active. The NHPB guide to how a debt management plan works has the details, and you can find an agency through the NHPB directory of options when it comes to nonprofit credit counseling agencies.
Which debts can be consolidated
Credit card balances are the most common debts people consolidate, and every method above can handle them. Store card balances, personal loans, and payday loans can usually be included as well, through either a consolidation loan or a debt management plan.
Medical bills can be combined too, but with a caution. Many medical bills carry no interest while they remain with the original hospital or doctor, and moving a balance like that onto a loan that charges interest makes the bill more expensive than it was. The NHPB guide to consolidating medical debt specific programs explains when combining medical bills helps and when it costs you money.
Federal student loans are the major exception on this page. They have their own consolidation process run by the federal government, it is free to use, and moving federal loans into any private loan permanently gives up federal repayment protections. The NHPB guide to how to consolidate student loans covers the federal process and the warnings that go with it.
Debts tied to property, such as a mortgage or a car loan, are generally not placed into these plans. They are usually refinanced on their own instead.
Deciding where to start
If most of your debt sits on credit cards, the NHPB guide to consolidating credit card debt compares the methods above as they apply to cards and helps you match one to your credit standing.
If you are still deciding whether consolidation makes sense for you at all, the benefits and the drawbacks are weighed in the NHPB guide to the pros, cons, and risks of debt consolidation.
And in some situations, no consolidation is needed. If one high-rate credit card is the main problem, there is no charge and no new account involved in simply asking that card company for a better rate. The NHPB guide to how to ask your credit card company for a lower interest rate explains how that conversation works.
Consolidation is also one form of debt help among several. Hardship programs, negotiation, legal aid, and other options are collected in the NHPB overview of programs that help people pay off debt.
Be careful with companies that sell consolidation
Businesses advertising debt consolidation range from legitimate nonprofit agencies to companies that do not tell you up front that their plan is really settlement. A few warning signs apply no matter who is offering the service. Federal rules do not allow a company selling debt relief services by telephone to collect its fee before it delivers results, so any request for a large payment up front is a serious problem. Be cautious of business names or mailers designed to look like a government agency, and of anyone who guarantees a specific amount of savings before reviewing your accounts.
Two checks take only a few minutes. Search the company's name online together with the word "complaint" and read what comes back, and ask your state attorney general's office whether complaints have been filed against the company. The Federal Trade Commission's guide on getting out of debt at https://consumer.ftc.gov/articles/how-get-out-debt explains what legitimate help looks like and how to check out a company before paying anyone.
This page provides a general explanation of debt consolidation methods. Loan terms, program rules, and eligibility differ by lender, agency, and state, and they change over time. It is not legal, tax, or financial advice. Before consolidating any debt, review your situation with a nonprofit credit counselor or a licensed financial professional.
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