Debt consolidation doesn’t just save you money. It also simplifies your financial life by rolling everything into a single monthly payment, sometimes with longer repayment terms. This will not only simplify your payments, but it also can ease your budget crunch by lowering the amount of money that you have to commit each month to debt repayment.
But which types of debt can be consolidated?
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Our take
- Debt consolidation refinances your debts, rolling them into a single loan with one monthly payment
- Most types of unsecured debt can be consolidated. This includes credit card bills, payday loans, personal loans, medical bills and even some student loans
- Secured debts like car loans usually aren’t a good choice for consolidation
- Consolidating high-interest loans can save you thousands of dollars over the life of the loan
READ MORE: How debt consolidation works?
5 types of debt you should be consolidating
1. Credit card debt
Almost half of Americans carry over credit card debt from month to month. The average household total currently stands at $7,279 of debt in their credit card accounts. When you figure that the average credit card has an annual percentage rate of about 20%, that can add up quickly for people who are only making the monthly minimum payments. This is not a coincidence. This is why credit card companies are so profitable.
| Financial benefit | Credit score benefit |
| A lower interest rate will save you quite a bit of money over the life of the loan. If you have a credit card with a $10,000 balance and want to pay it off over 24 months, leaving it on your credit card at a 19.99% APR will cost you 24 payments of $508 per month. Consolidating to a 7.5% APR loan will save you $1,419 in interest and $58 monthly. | If your credit cards are near their credit limit or maxed out, your credit utilization ratio is probably high and dragging down your credit score. As you pay off those credit cards using the loan proceeds from your new loan, your credit utilization will fall and your credit score will rise. |
2. Payday loans
Payday loans are small loans with extremely high interest rates. Because they have to be repaid in two weeks, they can be extremely dangerous because many borrowers still don’t have the money to repay the loan on the due date. By rolling payday loan debt into a new loan, you can save rollover fees and avoid getting stuck in the debt trap.
| Financial benefit | Credit score benefit |
| Huge. Payday lenders usually charge fees ranging from $10 to $30 for each $100 borrowed. This can often be the equivalent of a 300%+ annual percentage rate. And even though several states have outlawed payday lenders, there are ways the lenders can sidestep these state laws, sometimes trapping unsuspecting borrowers with loans with APRs higher than 1,000%. | Payday loans don’t usually appear on credit reports, so the impact will be negligible unless you’ve completely stopped making payments and the account has been handed off to a debt collector. After that, the unpaid loans will appear in your credit history. If that has already happened, using a new loan to pay off your unpaid loans will bump your credit score. |
3. Student loans
Consolidating student loans is often a popular option for borrowers who are struggling with repayment. They can save money on interest and reduce their monthly payments. However, this won’t be a good option for everyone.
Pro tip: In the wrong situations, consolidating student loans will worsen your financial situation rather than improve it.
Student loan consolidation may be a good fit if you:
- You have high-interest private student loan debt
- Your new loan (whether federal or private) carries a much lower APR than your current student loan debt.
Though private and federal student loans are eligible for consolidation, you should first try to consolidate any federal loans through the Department of Education. Otherwise, you could miss out on valuable government help like income-driven repayment plans, payment pauses or student loan forgiveness.
| Financial benefit | Credit score benefit |
| This is best for people with private student loan debt with high interest rates and who qualify for a new loan with a significantly lower rate. | Credit mix accounts for 10% of your credit score. This means the more open accounts you have with balances, the more likely it is to hurt your credit score. By consolidating, you’re lowering the your number of outstanding accounts. |
4. Unsecured personal loans
These personal loans often target borrowers with bad credit and can have higher-than-average interest rates. If you have one of these loans but have since significantly increased your credit score, you will likely qualify for a better interest rate. Applicants with good credit will always qualify for the best loan rates.
| Financial benefit | Credit score benefit |
| Some personal loans have rates up to 35.99% APR. Refinancing to a loan with a 7.5% APR can either save you thousands over the life of the loan or can knock hundreds off your monthly payment. | Personal loans are installment accounts, so rolling any revolving debts (like credit card debt) into an installment account won’t hurt your credit utilization ratio. |
Pro tip: Some lenders allow you to prequalify for personal loans with only a soft credit check, so you can check to see whether you qualify for a lower interest rate — and figure out whether debt consolidation would make financial sense — before committing to a hard credit inquiry that will lower your credit score for a few months.
5. Medical bills
These are a bit more complicated. You have more flexibility when repaying medical bills and many creditors will negotiate with you and work out flexible payment plans. And if for some reason you can’t afford to make your payments, it won’t be reported to the credit bureaus until your payments are past-due by more than six months.
Because of this, refinancing may not always make sense.
| Financial benefit | Credit score benefit |
| If you’re juggling multiple payments or have several smaller medical bills that you can’t manage, rolling everything into a single loan can make it easier to manage. | Medical bills are a bit different. Credit bureaus provide a 365-day grace period before unpaid medical collections appear on your credit report. It may not make sense to consolidate these debts until the grace period is about to expire. |
Why debt consolidation works
Debt consolidation rolls your current debts into a new loan with a lower interest rate. You’ll owe the same total amount, but can save thousands of dollars in interest during the life of your loan because you’re refinancing debt with higher interest rates.
In addition, because you have one monthly payment, it makes budgeting simpler and it’s easier to avoid late payments, which will hurt your credit score.
READ MORE: Debt consolidation pros and cons
Pro tip: Debt consolidation will only work if you qualify for a lower interest rate. Refinancing existing debt into loans with higher interest rates won’t make financial sense. Always compare loan offers to ensure you get the lowest possible interest rate.
Debt consolidation options
There are two primary types of debt consolidation:
Balance transfer credit cards: These credit cards offer an introductory interest rate of 0% APR for a fixed timeframe, usually 12 to 21 months. You then transfer your existing debts onto the new card. Instead of paying interest, you’ll pay a single balance transfer fee ranging from 3% to 5%. They have a variable monthly payment.
Pro tip: These are a no-brainer for borrowers with excellent credit. Even if you can’t complete repayment before the introductory period ends, as long as you maintain your good credit score, you’ll be able to qualify for a debt consolidation loan when your interest-free period is about to end.
READ MORE: How balance transfer credit cards work
Debt consolidation loans: This involves applying for a new loan with a lower interest rate, then using the loan proceeds to pay off all your other loans. Because they’re installment loans, you’ll be left with one single monthly payment. They will have a fixed monthly payment.
Do you need help with debt consolidation? Contact us at DebtHammer to set up a free consultation. Our staff will analyze your financial situation, check more than 15 loans at once to see whether you’ll qualify and tell you how much you can save.
READ MORE: Best debt consolidation loans
Factors to consider
- Do you have a lot of high-interest debt
- Loan amount needed
- Loan term offered
- Will you have a lower monthly payment?
- Minimum credit score requirements
- Will you have to pay fees or penalties?
- Total debt amount
- Are you in the process of getting divorced?
- Lender eligibility requirements
- Which types of debt you need to consolidate
- Your debt-to-income ratio
- Have you ever filed for bankruptcy?
READ MORE: Balance transfer credit card vs. personal loan
Pro tip: Read all loan terms carefully. Some personal loans have a lot of fees hidden in the fine print.
READ MORE: Why consolidate debts?
Loans that can’t be consolidated
Secured loans — loans secured by an asset — are not eligible for debt consolidation. This includes:
- Auto loans
- Home loans
- Home equity loans
- Home equity lines of credit (HELOCs)
READ MORE: Debt consolidation for married couples
Other ways to get debt relief
Debt settlement: Debt settlement companies will contact your creditors and negotiate settlements that are lower than the full total you owe. Sometimes those payments are a single lump sum but can also be repaid over a term. The fees may initially sound high, but you’ll find it can be an affordable way to get out of debt.
READ MORE: How to get your debt under control now
Debt Management Plans: These are offered through nonprofit credit counseling agencies. The credit counselor will negotiate payment plans with your credit card issuers, but you’ll have to close your accounts.
READ MORE: Debt management vs. debt settlement
The bottom line
If you’re overwhelmed with debt or struggling to scrape together too many minimum payments each month, debt consolidation may be a way out.
Some lenders work with applicants with all levels of credit, so even if you think you won’t qualify for a new loan, you could be pleasantly surprised and it could be just what you need to get your finances back on track.
