Should I Consolidate My Debt?

A few introductory credit card offers here and there, and suddenly you have balances on multiple cards. Now you're juggling due dates while staring down the end of your intro offers, and you need a way to manage multiple debts at once.

Debt consolidation could be a wise move if you're struggling with multiple debts. Sure, it won't reduce what you owe like some debt relief strategies. But paying off multiple debts with a new loan could simplify your finances and hopefully reduce your overall interest rate.

Consolidation isn't without its cons, however, and it's not for everyone. Learn more about how it works so you can determine if it's the right move for your situation.

What Is a Debt Consolidation Loan?

A debt consolidation loan is a new loan that you use to pay off existing debts. You may have a few different options for consolidation loans:

• Personal loans. These are usually unsecured, which means they don't require you to put down collateral (something the lender can take and sell if you don't keep up with your payments). Loans are generally best if you have a smaller amount to consolidate.

• Home equity loans. These are secured loans that use your home as collateral. This means the lender could take your home if you don't pay your loan. But it also means you can often access more money than you'd get with an unsecured loan, and the interest rates are usually lower than other types of loans.

• Home equity line of credit (HELOC). This is like a reusable home equity loan. You get a line of credit you can borrow from, repay, and then use again as much as you want, up to your limit, during the draw period. Like a home equity loan, a HELOC is backed by your house, so you risk losing it if you don't repay your loan as agreed.

• Balance transfer credit card. These are credit cards that offer low or zero interest rate promotions. You usually get six to 21 months of 0% APR on transferred balances. You'll likely need to pay a transfer fee and these offers usually require good credit.

The best type of loan to use to consolidate your debt depends on your situation. Secured loans usually have the lowest interest rates, while unsecured loans don't require you to have collateral.

How Debt Consolidation Can Help You With Your Debt

Here's a closer look at some of the benefits debt consolidation could provide.

You could save money over the long term

If you have a lot of high-interest debt, like credit card balances, there's a decent chance a debt consolidation loan could help you get a lower interest rate. Consolidating at a lower rate could mean you pay a lot less in interest compared to what you'd pay on your credit cards. 

You'll have fewer bills to manage

If you have debt across multiple credit cards or loans, and you pay them off with a debt consolidation loan, you'd then only have one bill to worry about going forward. This can make it easier to keep track of your payment due dates and balances.

Your monthly payment may be lower

Your minimum monthly payment on your debt consolidation loan might be lower than the combined minimum payments across all of your credit cards. That gives you a little more breathing room in your budget, which could make it easier to pay back what you owe and avoid new debts.

When Debt Consolidation Might Not Be the Right Answer for You

There are times when debt consolidation isn't the best way to handle your debt. Here's when you might need to look at alternatives.

You're going to keep using your credit cards

For debt consolidation to be effective, you have to avoid taking on new debt. Otherwise you risk winding up in an even worse financial position than you were in before taking out the loan.

Say you pay off your existing credit cards with a debt consolidation loan and then charge them right back up again. Now you not only have a consolidation loan to pay every month, you've added more high-interest debt onto the pile. 

If you're going to consolidate, you need to address whatever issues led to the debt in the first place.

You won't save much or any interest

You're not guaranteed to save money with consolidation. To actually save money, you need the consolidation loan to have a lower interest rate than you're paying on average on your debt right now. This will probably require at least fair credit and perhaps collateral like home equity.

Plus, you need to consider any fees in your numbers when you calculate the potential savings. A moderate drop in your interest rate could lead to a lot of savings on larger loans, but it could be offset if the origination fee or balance transfer fee is too high.

The monthly payments are too much for you

While some debt consolidation loans could lead to lower monthly payments—others won't. If you wouldn't be able to afford your consolidation loan payments, then it's not the right choice.

Alternatives to Debt Consolidation Loans

Debt consolidation loans aren't the only way to deal with multiple debts. You can also try these methods:

• DIY debt repayment. If you can afford your monthly payments, you could repay your debts as they are. The debt avalanche or debt snowball method could help you prioritize your debts so you can make a repayment plan. 

• Debt management plan (DMP). Credit counselors can help you set up a debt management plan (DMP) to pay back what you owe. They sometimes can negotiate with your creditors to reduce interest rates or waive fees, but you might have to close your credit cards to do this. You make a monthly payment to the credit counselor, and they disburse the funds to your creditors for you.

• Debt settlement. Debt settlement is worth considering if you can't afford to pay off your debts in full. Instead, you negotiate with your creditors to accept less than what you owe and forgive the rest. You can do this on your own, or with the help of a professional debt settlement company like Freedom Debt Relief.

Explore All the Options

Debt consolidation can be the right choice for certain people, but it depends on the type of debt you have, and what other financial changes you're prepared to make. It's worth comparing all your debt relief options before deciding which one makes the most sense for you.