When you’re dealing with Thanksgiving leftovers, do you cram every casserole dish, Dutch oven, and pie tin into the fridge until the shelves threaten to break? Or do you transfer all the food into a few airtight containers to save on space?
If you’re like most people, you consolidate those leftovers to make storage (and cleaning) a lot easier — it makes sense to put your two remaining slices of chocolate pie together with the single slices of pumpkin and pecan instead of keeping them in three separate containers.
Consolidating debt is a similar strategy for managing multiple loans. Instead of
juggling lots of bills with different due dates, interest rates, and balances, you combine them into a single streamlined payment.
Wondering how it works and whether you’re a good candidate for this financial strategy? In this guide, we’ll break down the ins and outs of debt consolidation, from the pros and cons to instructions on how (and when) to apply.
How does debt consolidation work?
Debt consolidation lets you combine multiple debts into a single loan or payment, often with a lower interest rate or better terms. There are several ways to consolidate debt, including:
Personal loans or home equity loans. Borrowers take out a new loan to pay off multiple debts, leaving them with just one (usually more affordable) loan to repay.
Balance transfer cards. These
credit cards allow you to move high-interest balances onto a single card with a 0% introductory APR, giving you time to pay down the debt without accumulating additional interest.
Credit counseling programs. While not technically debt consolidation, some credit counseling programs can negotiate better repayment terms with creditors. You’ll make one monthly payment to the credit counseling agency, which distributes the funds to lenders on your behalf.
No matter the method, the goal for people who consolidate debt is the same: to save on interest, simplify repayment, and make debt easier to manage.
When is debt consolidation a good idea?
Debt consolidation isn’t a one-size-fits-all solution for every borrower, but it can be a smart move in certain situations. Here are a few signs that it might be worth looking into.
You’re dealing with high-interest debt. If you have a lot of
credit card debt or a high-interest personal loan, consolidating into a lower-interest loan or moving your debt to a balance transfer card could help you save money over time.
You’re juggling too many monthly payments. Keeping track of multiple bills, due dates, and interest rates can take a toll on both your
financial and mental health. Combining debts into one payment can help cut down on stress.
You need lower monthly payments. If your current budget is stretched too thin, consolidating debt into a balance transfer card or a personal loan with a longer repayment term could help make your payments more manageable (though you may pay more in interest overall).
You want to switch from variable to fixed interest rates. If some of your loans have fluctuating interest rates, consolidating into a fixed-rate personal or home equity loan can provide more stability and predictable payments.
If any of these scenarios sounds familiar, now could be a good time to consolidate debt. But before you take the next step, it’s important to weigh the pros and cons to make sure this strategy aligns with your financial goals.
The pros of debt consolidation
We’ve already mentioned some of the benefits of debt consolidation. Now, let’s get into them in a bit more detail. Combining your debts could help you:
Receive a lower interest rate. Consolidating high-interest debts into a lower-rate debt consolidation loan can save you money over time, funneling more of your payment toward the principal balance instead of interest.
Pay off debt faster. Credit cards let you make small minimum payments indefinitely — a recipe for racking up interest. If you lock in a lower interest rate and agree to a structured repayment plan, you may be able to pay off your debt sooner.
Have just one monthly payment. Debt consolidation rolls everything into one payment, making budgeting easier and reducing the chances of missed payments.
Build your credit. Paying down revolving debt (like credit cards) can lower your credit utilization ratio — an important part of your credit score. Plus, making consistent on-time payments on your new loan can contribute to building your score over time.
The cons of debt consolidation
There are two sides to every coin, including debt consolidation. These are the drawbacks you’ll want to weigh against the benefits:
You may not qualify for a low rate. Lenders usually reserve the best consolidation loans and balance transfer offers for borrowers with a good credit score. If your credit score isn’t in great shape, you might not get a lower interest rate — meaning consolidation won’t save you much (or any) money.
You could fall behind on payments. Debt consolidation simplifies your debt, but it doesn’t erase it. If you struggle to keep up with payments, missing one could lead to late fees, a hit to your credit score, or even defaulting on the loan.
You’re not addressing the root problem. If overspending or poor budgeting is what got you into trouble, debt consolidation is a bad idea unless you’re also focusing on building better financial habits. If not, you may wind up with an even bigger debt to repay.
It might cost more in the long run. Some debt consolidation loans extend your repayment term to lower your monthly payment. While that may provide short-term relief, it can also mean paying more in interest over time.
How to get a debt consolidation loan in 4 steps
Have you decided that the pros of debt consolidation outweigh the cons? Then it’s time to get your ducks in a row to apply. Here’s how to get started.
1. Check your credit score
Your credit score plays a big role in the interest rate you’ll qualify for. The best rates usually go to borrowers with good to excellent credit (670+). If your score needs work, take steps to strengthen your credit profile before applying.
EarnIn’s
Credit Monitoring tool let’s you check on your credit score any time — with no hard inquires required
. You never have to guess where your score is sitting so you can feel confident when applying.
2. Make a debt consolidation plan
Take stock of your existing debts — your balances owed, interest rates, and monthly payments. Decide how much you need to borrow and whether consolidating debts will actually save you money.
3. Find and compare debt consolidation loans
Shop around with banks, credit unions, and online lenders to compare interest rates, fees, and repayment terms. Look for a debt consolidation loan that offers better terms than what you currently have.
4. Apply for your loan
Once you’ve found the right lender, submit your application. If approved, use the loan funds to pay off your existing debts, then focus on making consistent, on-time payments on your new loan.
EarnIn: An easy alternative to a debt consolidation loan
Does thinking about personal loans versus debt consolidation loans versus credit card balance transfers makes your head spin too much to take action? Or do you think your credit score or financial habits aren’t quite to the point they need to be to apply?
We’re here to help! EarnIn offers a suite of tools that make managing finances easy, including
handy calculatorsto help you budget and stay on top of your credit cards. When you’re stressed about having the funds you need for an upcoming payment, our
Cash Out tool lets you get paid as you work — up to $150 a day with a max of $750 between paydays
. And our
Credit Monitoring tool allows you to keep a close eye on your credit score any time, for free.
Ready for a partner on your journey to pay down debt?
Download EarnIn to make every day payday.
Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.
EarnIn is a financial technology company, not a bank. Banking services are provided by our bank partners on certain products other than Cash Out.
Calculated on the VantageScore® 3.0 model. Your VantageScore 3.0 from Experian® indicates your credit risk level and is not used by all lenders, so don’t be surprised if your lender uses a score that’s different from your VantageScore 3.0.
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EarnIn is a financial technology company, not a bank. Banking services are provided by our bank partners on certain products other than Cash Out. The calculations provided are based on estimates and should be used for informational purposes only. Please be aware that comparisons may not be 100% accurate. The insights and data presented do not constitute financial advice, and we recommend consulting with a qualified financial advisor for personalized guidance.
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