How Does Debt Consolidation Work?

woman looking over her debt and finding out that Integra Credit can help with a debt consolidation loan

Being in debt isn’t easy. Repayment is challenging enough, but keeping track of multiple loans and lenders can feel downright overwhelming. So how can you simplify your financial situation and stay on top of what you owe?

One solution is debt consolidation. In this article, we’ll discuss debt consolidation, how it works, and how to figure out if a debt consolidation is the right fit for you.

What is Debt Consolidation?

Debt consolidation is a process by which an individual uses a personal loan to pay off various other debts. If you’ve acquired a lot of different debt that’s compounding at high interest rates from various lenders, consolidating can make your life simpler, easier, and may lower your interest rate.

Three main types of debt that might be consolidated include:

Credit Card Debt

Credit card debit is a huge financial burden for many Americans. Indeed, the average credit cardholder in the U.S. had $5,769 in credit card debt in Q1 2022. This is up about 3% from Q1 2021.

If you have a lot of debt on different credit cards, consolidating is a financially savvy option. The average credit card APR is between 16-18%. If you consolidate high-interest debts like these into a loan with a lower interest rate (say, 8%), you’ll save a significant amount of money over the long term.

Student Loan Debt

Many students have taken out multiple loans to cover their undergraduate or graduate degrees. Consolidating student loans can also provide lower interest rates and other benefits like income-based repayment.

Personal Loan Debt

Personal loans tend to come with the most competitive interest rates. However, if you had a lower credit score in the past and it has since improved (or interest rates have significantly decreased) you may be able to secure savings with a better interest rate.

Types of Debt Consolidation Loans

Let’s break down the most common types of loans used to consolidate debt.

Bank Loans/Credit Union Loans

The most traditional way to consolidate debt is to take out a fixed-rate debt consolidation loan from a bank or a credit union. You’ll use this money to pay off the other debts you owe.

Personal Loans

Personal loans aren’t too different from the debt consolidation loan you’d get from a bank or credit union. However, you will need to do your homework. Personal loans tend to vary widely in terms of interest rates and payment plans. Shop around and compare before committing to a personal loan so you can find the one that will best suit your financial situation.

Credit Cards with Balance Transfers

Your third option for consolidating debt involves getting a new credit card with a low interest rate that allows balance transfers. Balance transfers give you the power to move debt from one credit card to another. This means you can put all of your debt in a single location (the new credit card) and you’ll be free of multiple payments over multiple cards with steep interest rates.

How Debt Consolidation Works

Put simply, debt consolidation combines multiple debts into a single manageable debt. When seeking a debt consolidation loan, here are some best practices:

  • Compare lender terms. Shop around and compare interest rates, fees, loan terms, and repayment plans. Think about your own financial situation. Which lender’s terms will best suit your needs?
  • Prepare your application information. You’ll need to provide your personal information including address, contact info, date of birth, social security number, housing and income information, and the desired loan amount. You may also need recent pay stubs, bank statements, or tax returns.
  • Apply. If all goes well, the lender will either send the funds to you or disburse them to your other creditors directly.
  • Manage your new loan. Once you’ve paid off all your old debts, make sure you pay your new consolidation debt on time. Consider setting up reminders or automatic payments.

Is Consolidating Debt a Good Idea?

Whether or not consolidating your debt is a good idea depends entirely on your personal situation. Generally speaking, consolidating debt is wise if:

  • You have a strong credit score and can qualify for a lower interest rate. Excellent credit means you’re likely to get a better interest rate on a consolidation loan than you are currently paying on your various other debts.
  • You need to simplify the management of your finances. If you struggle to juggle multiple debts and payment plans, consolidation will drastically simplify your monthly financial responsibilities. It can be a savvy option for those prone to incurring late fees or penalties.
  • You want a more predictable financial situation. Most debt consolidation loans have a fixed interest rate. They create consistency and allow for easy budgeting.

FAQs

Is there a difference between debt settlement and consolidation?

Yes. Debt settlement reduces the total debt that you owe, while debt consolidation reduces the total number of creditors whom you owe.

Recent Posts

What is a Soft Credit Inquiry?

While your credit score is only three digits, it can impact every facet of your life. From purchasing a car to renting an apartment to finding employment, your credit score may be a determining factor. That's why it's critical to understand how credit works and the factors that can negatively impact it, such as credit inquiries. A credit inquiry is any request by an authorized party to access your credit report and score. Read on to learn more about soft credit inquiries and their implications.

Read More >
What Is a Credit Report?

A credit report is like a history book, but instead of being about rulers, civilizations, or wars, it’s a history of your ability to manage debt. Lenders and other companies will open this book, review your past debt management, and then decide if you’re a good bet to do business with. This history book includes the records of how well you pay your bills, your amount of debt, what types of debt you have, and the age of your credit accounts. If a payment has been 30 days late or you have a perfect payment history, these things are reflected on the report and could result in very different outcomes when applying for future credit. From this past credit management experience comes a three-digit number called a credit score which has a significant impact on your ability to qualify for new credit.

Read More >
How Long Does a Credit Card Balance Transfer Take?

We’ve all seen credit card solicitations promising a balance transfer with low or zero interest on the amount transferred for a specific period of time. People have several reasons why they transfer their balances, sometimes for convenience or potential financial savings, but it can be unclear how long the actual transfer will take. Let’s talk about how balance transfers work, the types of balance transfers, how long the process usually takes, and when it isn’t a good idea to utilize a balance transfer.

Read More >

Apply Quickly & Securely

Apply Quickly
& Securely

Fast, short and
secure application
Instant approval
decision
Choose how much
cash you need
Money in your account
as early as tomorrow*