How to Consolidate Debt

Juggling several credit card payments each month can be difficult. Between different due dates, interest rates, and payment amounts, it’s quite hard to keep track of where your money is going. No wonder people look for ways to simplify payments, lower interest rates, and pay off debt faster.

There are several ways to do this and one is debt consolidation. The following will help you learn how to consolidate debt and decide for yourself whether it’s the right debt management solution for you.

What is debt consolidation?

Debt consolidation is a method of combining multiple debts into a single account, then paying it off under terms that you work out with a new creditor. Most often, you consolidate debt by taking out a loan with lower interest than you’re paying now.

There are many types of loans that can be used for debt consolidation, including unsecured loans like a personal loan or balance transfer card, as well as secured loans like a home cash-out refinance. Debt consolidation could help you simplify your monthly payments, save money on interest, and get out of debt faster. But before you decide, you should first understand how to consolidate debt.

How does debt consolidation work?

The process of debt consolidation involves taking out a new loan or other type of credit to cover any outstanding debts. Once approved, you use the money to pay off your current debts, then pay your new creditor under the terms of your loan agreement.

Generally, the length of time you have to pay back these loans ranges from two to five years for a personal loan, or five to 30 years for a cash-out refinance. On the other hand, if you choose to consolidate debt with a balance transfer card, your repayment period is open-ended and you may have to pay fees. So make sure this is the right choice for you before you commit.

Should you consolidate your debt?

When deciding whether you should consolidate your debt, there are many factors to consider. Here are some signs that debt consolidation could be right for you:

  • You have several open accounts: Debt consolidation could help reduce the stress on your time and your wallet by simplifying your monthly payment schedule.
  • You’re paying a high interest rate: Debt consolidation may be a way to lower your overall interest rate and to pay down your debt faster.
  • You have good credit: A high credit score means you’re more likely to get better terms with debt consolidation; otherwise, the interest rate could be higher.
  • You can afford to pay more than you’re paying now: Many debt consolidation options will cost you more each month than your current minimum payments; so if you can handle a higher monthly cost, this option may be right for you.

Debt consolidation options

Depending on your current financial situation, you may have several consolidation options available. Knowing the costs and benefits of each is essential to making the right choice.

Debt consolidation loans

A debt consolidation loan is a lump sum of money that you can use to pay off your existing debts. You will then pay back this single loan over time, with a potentially lower interest rate and better terms than what you had previously.

You can seek out a debt consolidation loan from a bank, a credit union, or an online lender. In all cases, you use the money from the loan to pay off existing debts, and then pay back the loan over a predetermined period of time with regular monthly payments.


Debt consolidation loans can be good for those individuals with high credit scores (700 or above), as the interest rate is in part determined by your credit. It also gives you a clear plan and specific end date for paying off your debt, which is good for those who are serious about changing their spending habits and getting rid of debt.


If you have a poor credit score, you may have trouble qualifying for a loan with the best rate and terms. And since it’s likely that your personal loan payments could cost more each month than you’re paying right now, this may not be the best option if you’re already struggling to make minimum payments. If you don’t keep up with your loan payments, your debt could become larger.

Balance transfer cards

A balance transfer card allows you to transfer your existing debt from higher-interest cards to a credit card with a low interest rate. You’re essentially using one credit card to pay off another, but if you can get a lower interest rate from your credit card company for the new card, it could end up saving you money.


Often, the introductory rate for a balance transfer card could be as low as 0 percent during a set period (often six months to a year). If you can pay off all your debt before the end of this introductory period, you may end up paying much less money in total.


You’re not likely to receive a balance transfer card unless you have good credit. Also, the amount you can transfer depends on your credit limit with the company, so it works best if you don’t have a very high amount of debt. Also, you should be aware that there are typically fees associated with transferring debt onto a balance transfer card.

Cash-out refinance

When you refinance your current mortgage with a cash-out refinance mortgage, you borrow more money than you owe on your current mortgage and use the remaining funds to pay off existing debts. This only works if your home has equity—in other words, if your home is currently worth more than you owe. The equity is transferred into cash, which you can use to help pay off your debts.


If you own a home and have substantial equity in that home, a cash-out refinance may be a good option for paying off existing debt. Your debts can be combined with your mortgage into one convenient monthly payment. Plus, you can extend the amount of time you have to pay off the debt to five to 30 years, depending on the type of loan.


However, taking out a cash-out refinance may put your house at risk for foreclosure if you are unable to pay back the loan.

When is debt consolidation a bad idea?

Knowing how to consolidate debt should clue you in to whether it’s the right solution for you, given your unique situation. Here’s more information on how to tell whether debt consolidation might be bad idea.

You have more debt than you can afford

If you’re dealing with a very large amount of debt, consolidation may not be the solution to your problem. Consolidating your debt might make you feel like you’ve solved your problem, but you’re essentially transferring your debt to a single account. If you can’t afford to pay off that account, you may find yourself still struggling.

You’re struggling to make monthly minimum payments

If you’re already having trouble paying the minimum amount due on your debts each month, debt consolidation might not be the answer for you. While a debt consolidation loan could help you get out of debt faster, it could also cost you a lot more each month than you’re paying right now. That’s why it’s important to talk to a loan provider and make sure you can actually afford the loan before you take it out.

You have a poor credit score

Consolidating your debt makes sense only if you can get a better rate than what you’re currently paying. However, it can be very hard to get a low-interest debt consolidation loan if you have a poor credit score. If you have poor credit and you are considering debt consolidation, make sure you can get a good rate. Otherwise, you could end up making your financial situation worse rather than better.

Debt consolidation alternatives

If debt consolidation isn’t right for you, there are still plenty of options for dealing with your debt. Depending on your financial situation, one of the following alternatives may be right for you.

Debt management plan

Debt management companies, also known as consumer credit counseling agencies, are typically non-profit organizations that help people learn how to better manage their money. If you’re struggling with high-interest debt, a credit counseling agency may offer a debt management plan that could help you get out of debt for less by reducing your interest rates.

Here’s how a debt management plan works:

  1. You enroll in a plan with a credit counseling agency and pay a small enrollment fee.
  2. The credit counseling agency reaches out to your creditors and negotiates a lower interest rate with them.
  3. Once your debt management plan is set up and the new interest rates are negotiated, you make monthly payments into an account that your credit counseling agency uses to pay your creditors.


Typically, debt management plans could get you out of debt in 36 to 60 months. This is a good option if the reason you can’t make headway on your debt is your high interest rate.


If you can’t afford to commit to the debt management plan and pay the required amount each month, this option may not be right for you. Keep in mind that they also collect a monthly fee for managing your plan.

Debt settlement

The debt settlement process involves you or a company working on your behalf negotiating with your creditors to lower the amount of debt you owe. If you’re able to demonstrate that you can’t pay the full amount you currently owe, debt collectors are often willing to agree to settle your debt for less.

Here’s how a debt settlement plan works:

  1. Voluntarily stop making payments to your creditors.
  2. Start saving into a separate account that you will use to pay your settlements with your creditors.
  3. After you’ve saved up enough money, you or the company you work with will negotiate a settlement with your creditors.
  4. Depending on the agreement, you could settle your new lowered debt with a large lump sum payment from your saved money or make payments according to a structured settlement plan.


If you’re struggling with $7,500 or more in credit card, personal loan, or medical debt, debt settlement could help you reduce what you owe and get out of debt in 24 to 48 months, depending on your creditors and the program.


If you’re dealing with more debt than you’ll ever be able to pay off on your own, bankruptcy could be a better option for you.

Choosing the right option

No matter what you decide, learning more about how to consolidate debt will help you make an informed decision. Debt consolidation may be the best option for you—especially if you have a good credit score, can afford to make more than minimum payments each month, or have equity in your home. But if you have a significant amount of debt that you’re struggling to pay on your own, other debt relief options like debt settlement could be right for you. Freedom Debt Relief can help you understand your options for dealing with your debt, including our debt settlement program. Our Certified Debt Consultants can help you find a solution that will put you on the path to a better financial future.