What Types of Debt Can You Consolidate?

Debt consolidation is the process of taking out a new loan to pay off multiple debts. You’re essentially bundling your various debts into a single, more manageable payment. This new loan often comes with a lower interest rate, saving you money in the long run.

Debt consolidation isn’t a one-size-fits-all solution. First, certain types of debt usually aren’t eligible for consolidation. Plus, there are pros and cons for different kinds of debts, including the potential impact on your credit score. 

But if you’re feeling overwhelmed by multiple debts, consolidation could be a viable solution under the right circumstances.

8 Things You Should Know About Debt Consolidation

1. Combines Multiple Payments into One: Debt consolidation simplifies your financial management by combining several monthly payments into one. This makes it easier to keep track of your debts.
2. Potential for Lower Interest Rate: One of the main advantages of debt consolidation is the potential to lower your overall interest rate. This can save you a significant amount of money in the long run.
3. Doesn’t Eliminate Debt: Debt consolidation doesn’t reduce the principal amount that you owe. It only restructures it. So, if you owe $10,000 across five different credit cards, you will still owe $10,000 to a single lender after consolidation.
4. Can Extend Your Repayment Period: Debt consolidation can lower your monthly payments by extending the repayment period. While this might make your debts more manageable, you could pay more interest over time.
5. Can Impact Your Credit Score: Applying for a consolidation loan results in a hard inquiry on your credit report, which can temporarily lower your credit score. However, consolidating your debt can eventually help improve your credit score if appropriately managed.
6. Not All Debts Are Eligible: Not all debts can be consolidated. Unsecured debts like credit card debt, personal loans, and student loans are typically eligible, while secured debts like mortgages and auto loans generally are not.
7. Potential Fees: Some loans have prepayment penalties, which are fees for paying off a loan early. Make sure to consider these fees when calculating the potential benefits of a debt consolidation loan.
8. Risk to Collateral: If you use a secured loan to consolidate, such as a home equity loan, you’re putting up collateral (your home, in this case). If you default on the loan, you could lose the asset.

Popular Debt Consolidation Services

Lenders offer different interest rates and terms for consolidation loans. The goal here is to get a consolidation loan with an interest rate lower than your current debts’ average rate. Lenders can offer interest rates anywhere from 6% to 36%, depending on factors like your credit score, your income, and the loan amount. 

Here are websites to compare loan terms, here are a few:

• NerdWallet offers a platform to compare different loan options, including those for debt consolidation.
• Bankrate provides a wide range of financial product comparisons, including personal loans for debt consolidation.
• LendingTree allows you to compare offers from multiple lenders at once, helping you find the best terms for your debt consolidation loan.
• Credible is another platform to compare multiple lenders and loan offers, including those for debt consolidation.

Consolidating Personal Loans

Personal loan consolidation can be tricky, mainly if you’ve borrowed them in an emergency. The rates can be high – sometimes as steep as 30% or more, especially for those with poor credit scores. 

By consolidating these debts, you could potentially bring that rate down, especially if your credit score has improved since you took out the initial loans.

• Pros: Consolidating high-interest personal loans can lead to significant savings, especially if you can secure a lower interest rate with the consolidation loan. It can also simplify your payments, making debt management easier.
• Cons: Some personal loans come with prepayment penalties, so consolidating them could result in additional fees. It’s also possible that you might extend your repayment period, which could lead to more interest paid over time.
• Impact on Credit: Initially, consolidating personal loans can cause a slight dip in your credit score due to the hard inquiry involved. However, making consistent on-time payments on your new loan can gradually improve your credit score.

SoFi offers personal loans that can be used for debt consolidation. They’re known for their competitive rates, particularly for borrowers with strong credit histories.

Discover provides personal loans for debt consolidation, with flexible payment terms and no origination fees. They also offer resources and tools for managing debt.

Consolidating Student Loans

Student loans, both federal and private, can also be consolidated. Consolidation can be particularly beneficial if you have multiple student loans with varying interest rates. 

As of 2023, the interest rate for federal undergraduate student loans is 4.99%, and federal graduate student loans is 6.54%. Private student loan rates could range anywhere from 3.65% to 15.99%, depending on the lender and your creditworthiness.

• Pros: By consolidating student loans, you can manage your debt with one monthly payment, potentially with a lower interest rate. Federal student loan consolidation can also give you access to income-driven repayment plans and potential loan forgiveness.
• Cons: If you consolidate federal student loans with a private lender, you lose federal benefits such as income-driven repayment and loan forgiveness options. Also, you may end up paying more over time if your repayment period is extended.
• Impact on Credit: Similar to personal loans, your credit score might take a slight hit due to the hard inquiry during the loan application process, but it can improve over time with consistent payments.

The U.S. Department of Education’s Federal Student Aid office offers Direct Consolidation Loans if you want to consolidate federal student loans. Note that this doesn’t apply to private student loans.

Earnest is mainly known for their student loan refinancing, but it also offers personal loans for debt consolidation. They provide flexible repayment options and don’t charge fees for origination or prepayment.

Consolidating Credit Card Debt

Credit card debts are another familiar candidate for consolidation. Given that the average credit card interest rate can hover around 16%, it’s no surprise that many seek to consolidate these high-interest debts into a more manageable loan.

• Pros: Consolidating credit card debts can significantly reduce your interest, especially if you can secure a consolidation loan with a lower interest rate. It also simplifies your payment process.
• Cons: Consolidation doesn’t address the behaviors that led to credit card debt in the first place. You could be in a worse position if you continue to rack up credit card charges without paying them off.
• Impact on Credit: Consolidating credit card debts can actually improve your credit score if appropriately managed. It can reduce your credit utilization ratio, which is a significant factor in calculating your credit score.

Payoff specializes in credit card debt consolidation. They offer loans specifically designed to help borrowers eliminate high-interest credit card debt.

LendingClub is a peer-to-peer lending platform offering personal loans for debt consolidation. They’re known for their fast funding times and flexible loan terms.

Consolidating Secure Loans: Mortgages and Auto Loans

While it’s less common to consolidate mortgages and auto loans, it is possible under certain circumstances.

Mortgage debt consolidation often takes the form of a cash-out refinance. This is when you refinance your existing mortgage for a larger amount and use the extra money to pay off other debts. 

Auto loan debt consolidation is less common but can be done, often through a cash-out refinance of your car loan or by using a personal loan to pay off the car loan.

What to Consider Before Debt Consolidation

Suppose you have a small amount of debt that you can pay off within six months to a year. In that case, the benefits of debt consolidation might be outweighed by the potential costs, like loan origination fees or early payoff penalties on your current debts.

Debt consolidation can help manage your debt, but it does not address the behaviors that led to the debt in the first place. Without a change in spending habits, you may accumulate new debt. You still need a solid plan to keep your spending in check and make consistent payments toward your debt.

Consulting with a financial advisor can be a good step toward finding the best solution for your unique situation. Don’t forget, though: tackling debt requires discipline and consistency, and consolidation is just one tool that can help you on this journey.