Debt consolidation can put a major dent in your debt levels—here’s what you should know if you’re considering it.

By Kristine Gill
November 01, 2019
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Debt can feel like an albatross around your neck. But just because you opted into various loan terms and interest rates over the years doesn’t mean you have to be stuck with them forever. And you don’t have to wait until you pay a loan off to have your burden lightened, either. Loan consolidation and debt refinancing can help make debt—of any kind—more manageable. Here’s when to consider debt consolidation or refinancing and how it might work for your situation.

How debt consolidation works

The main benefit to debt consolidation is being able to combine all of your outstanding debts into one loan, usually at a lower interest rate, for which you would have just one monthly payment. For folks with lots of outstanding debt at high interest rates, this can be a lifesaver, even if it just means you can see exactly how much you owe in one spot.

“Other benefits include locking in a fixed interest rate, only having to worry about one payment, and knowing just how long you’ll have to make those payments,” says Mike Kinane, head of U.S. Bank Cards at TD Bank. “If you're managing high-interest credit card debt, the rate on your card is likely a variable rate, which can always change. Consolidating your date into a fixed term loan locks you into a guaranteed term with one monthly payment and a concrete end date to the loan.”

Lauren Anastasio, a certified financial planner with SoFi, says combining credit card debts can be as easy as taking out a personal loan to cover the costs.

“Personal loans often come with a lower interest rate than your credit cards, and you can set manageable terms with your lender,” Anastasio says. “And using a personal loan may actually boost your credit score.”

It’s also possible to combine your private and federal student loans by refinancing them with a private lender, she says. 

Seems like a no-brainer, right?

Kinane says that, while most banks offer the service, you’ll want to make sure you’re getting a deal from a reputable source. Do the math, too, when it comes to the fees you could be charged.

“As with all big financial decisions, be mindful where you're getting your loan from and make sure you fully understand what you're signing up for—it’s important to always do your research,” he says. “Lenders make money by charging interest, and in many cases fees, on debt consolidation loans.”

Who debt consolidation works for

This kind of debt consolidation is most beneficial to individuals with several high-interest debts. Folks with low-interest debts won’t see much payoff for their effort, Kinane says.

“Responsible borrowers with good income and a solid credit history who are looking to take care of significant high interest rate balances are the ones who benefit the most,” he says.

If your credit score is low, or you’ve struggled to pay off your multiple debts, Anastasio says you might have a harder time finding a lower interest rate with your new loan. In that case, debt consolidation won’t likely save you much in the long run. You can also end up putting your assets at risk with secured debts.

“The feeling of ‘paying off’ the debt [by consolidating it] can give you a false sense you’ve paid off your debt and tempt you to open new lines of credit or start charging on the cards again,” Anastasio says. “But remember, you’ve only consolidated your debt into one loan, so you still owe just as much as you did before.”

If you own a home, debt consolidation almost always helps lower monthly mortgage payments.

“A mortgage payment is typically the biggest payment you make each month, so even a slight reduction can make a significant impact on your household budget,” Kinane says. “Pay attention to mortgage rates and take note of when they drop below your current rate. The larger your mortgage, the less significant the drop needs to be to benefit from refinancing.”

Kinane says to keep in mind that even as it might save you money over the long term, refinancing comes with fees for appraisals, credit checks, and underwriting, among other things.

Can debt consolidation work for you?

The first step to exploring this option is to do a little research online. Some financial institutions, such as Figure, offer home equity loans and lines of credit (in Figure’s case, the Figure Home Equity Line) that can consolidate your debt in one spot at a low interest rate to help you reach your other goals, such as building an emergency fund. You can do a quick search—and risk-free pre-certification on Figure’s site—to find out what rates you qualify for.

If your rate options seem promising, you can meet with a banking specialist or chat with representatives for online banks or digital lenders who can evaluate your personal finance situation and help you plan the best course of action.

“It is called personal finance for a reason—it’s personal,” Anastasio says. “There is no cookie-cutter way to tackle debt. It’s what works best for you and your financial situation.”

Kinane says it’s important to realize that your journey to financial independence and becoming debt-free shouldn’t end once you’ve consolidated your loans.

“Consolidating is the first step; changing the habits that led you there should be your next priority,” he says.

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