Debt Consolidation

Struggling to manage your debt payments? Consolidating your debt can be a great way to simplify your finances and bring your month-to-month spending under control.

But there are many forms of debt consolidation and each method comes with certain risks. So before making a decision, here are all the things you need to consider.

Debt consolidation basics

To consolidate your debt is to bring multiple debts together into one, single payment.

The benefit of debt consolidation is usually some combination of the following:

  • Fewer monthly payments to manage
  • Lower total interest charges
  • Smaller total monthly payment
  • Lower total cost to repay all debts

In other words, debt consolidation should make your life easier and save you money. Of course, that’s not a guarantee.

Read more: Is Debt Consolidation Going to Help You?

Debt consolidation options

There are multiple ways to consolidate your debts. Here are what might be considered the six most common methods:

Unsecured consolidation loan

You can take out a unsecured loan from your financial institution of choice and use the funds to repay your outstanding debts. You'll then be repaying the loan each month instead of your old debts.

Read more: Pros and Cons of Consolidating Debt with an Unsecured Loan

Home equity loan

If you have equity in your home, you can take out a loan against that equity and use the funds to repay your debts.

Read more: Pros and Cons of Consolidating Debt with a Home Equity Loan

Mortgage refinance

 By taking out an entirely new mortgage on your home, you can repay your old mortgage and other unsecured debts, leaving you with only the new mortgage.

Read more: Pros and Cons of Consolidating Debt with a Mortgage Refinance 

Debt management plan

Working with a nonprofit credit counseling agency, you can sign up for a debt management plan. Here you'll make one payment each month to the agency, which will make creditor payments on your behalf. This is not a loan, but most creditors will offer reduced interest rates and other perks for repaying through a debt management plan.  

Read more: Pros and Cons of Consolidating Debt with a Debt Management Plan

Balance transfer

If you qualify, you can open a new credit card and transfer your other unsecured debts to this card.

Read more: Pros and Cons of Consolidating Debt with a Balance Transfer

Debt settlement program

Debt settlement is consolidation only in the sense that you will only be making payments to the settlement program, rather than your creditors. Once the settlement agency has enough funds accrued, they will negotiate with your creditors for reduced payoffs.

Read more: Pros and Cons of Consolidating Debt with a Debt Settlement Program

Each method is considerably different from the others, so make sure you understand each option before making a decision.

Debt consolidation drawbacks

There’s a lot to like about the general idea of consolidating your debts. No what method you pursue, however, keep in mind that there are some key drawbacks you must consider:

  • Some methods may require good to excellent credit
  • Any time you take unsecured debt and add it to your mortgage, you raise the risk of falling behind on your mortgage payments
  • You may only have one payment, but it’ll be a (relatively) big one, and one miss can damage your credit significantly
  • Consolidation can help you repay your debt, but it won’t stop you from creating more debt

Before you take the plunge, make sure you understand the risks and how the features of your chosen debt consolidation method will mesh with your own financial habits.

Read more: The Dangers and Drawbacks of Debt Consolidation

Debt consolidation and your credit

Debt consolidation and credit are linked in a number of ways:

  • Some consolidation options require strong credit scores
  • Some consolidation options have no credit requirements at all
  • All consolidation options will have some sort of impact on your credit (for better or for worse)

When weighing your options, be sure to consider your credit.

Learn more about credit and debt consolidation:

Next steps

Any lingering questions about debt consolidation? Check out the article linked below for more information. Hungry for more answers? Connect with one of MMI’s trained credit counselors. If you have questions about debt, credit, and personal expenses, they have the guidance and resources you need.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.