Understanding Debt Consolidation

Has juggling multiple accounts, due dates, and payment amounts become overwhelming? Debt consolidation streamlines multiple payments into one and can help you regain control of your financial life

In this article, we’re doing a deep dive into debt consolidation to help you decide if it’s right for you. 

What is debt consolidation? 

Debt consolidation combines multiple debts into one, simplifying payments and potentially reducing costs. It's commonly used to: 

  • Merge multiple payments into one monthly installment. 
  • Lower overall borrowing expenses. 
  • Regain financial control. 

Here's how it works: 

  • Step 1: Assess your existing debt, including amounts, interest rates, and monthly payments. 
  • Step 2: Research consolidation options like personal loans, balance transfers, or debt management plans. 
  • Step 3: Apply for a consolidation loan covering your total debt. 
  • Step 4: Use the loan to pay off existing debts entirely
  • Step 5: Make monthly payments on the consolidation loan until it's cleared. 

Loans for debt consolidation typically offer lower interest rates than the original loans or extended repayment periods that can help you get back on track with budgeting your finances. 

When is debt consolidation a good idea? 

Debt consolidation can be an effective solution for many different financial circumstances. Here are just a few scenarios when you might consider consolidating debt: 

  • You have multiple high-interest debts. High-interest debts can be merged into a single loan with lower rates, saving money over time. 
  • You’re dealing with variable interest rates. Fixed-rate consolidation loans provide stability compared to variable interest rates. 
  • You have difficulty keeping track of payments. Simplified payments reduce stress from tracking multiple due dates and amounts. 
  • Your monthly payments are too high. Consolidation can lower monthly payments, easing financial strain. 
  • You need to improve your credit score. Streamlining multiple accounts may boost your credit

Understanding your financial position is crucial to realizing these benefits. Done correctly, debt consolidation can be a key step toward financial stability. 

>RELATED: What Is the Average Credit Score by Age? 

When shouldn’t you consolidate your debt? 

Debt consolidation isn’t a cure-all, so it’s important to recognize scenarios when it’s not the best option to consider: 

  • Balance transfer cards or home equity loans with high fees and closing costs that outweigh any benefits. 
  • If the consolidation loan's interest rate is higher than your current debts, you'll end up paying more. 
  • Unstable finances, such as job insecurity or recent financial crises, make debt consolidation risky. 
  • Consolidating certain debts, like federal student loans, can lead to the loss of valuable benefits like deferment or loan forgiveness. 
  • It's ineffective if underlying poor financial habits persist, potentially leading to further debt accumulation. 

Always assess the pros and cons of consolidation options to ensure they align with your financial objectives. 

How to consolidate your debt 

While debt consolidation loans are the obvious way to consolidate debt, they’re not the only option. Personal loans, credit card balance transfers, and home equity loans can also be used for consolidation. 

Next, we’ll discuss debt consolidation loans and alternative ways to combine multiple debts into one. 

Debt consolidation loan 

Obtaining a debt consolidation loan follows similar steps to acquiring a traditional loan: 

  • Step 1: Research reputable lenders that offer debt consolidation loans. 
  • Step 2: Compare loan rates and terms offered by different lenders. 
  • Step 3: Review the eligibility criteria for each lender. 
  • Step 4: Pick the loan that best meets your needs. 
  • Step 5: Gather documents such as identification, pay stubs or other proof of income, bank account and routing numbers, and the accounts you want to consolidate. 
  • Step 6: Apply for a loan amount that covers the total outstanding debt. 
  • Step 7: Wait for the lender’s approval decision. 

If approved, review the loan agreement terms and conditions carefully to calculate the loan cost. You can use online loan calculators or other financial tools to estimate the total cost of the loan over the repayment period. Compare this with your total debt to see if you’ll get any savings from the consolidation loan. 

If you’re satisfied with the benefits of consolidating, you can accept the loan offer with confidence knowing it can help you achieve your desired financial goals. 

Personal loan 

Years ago, I decided to consolidate my debts and called my bank to discuss a consolidation loan. It turns out my bank didn’t offer those, but the representative suggested another option: a personal loan secured by my car. It was a great solution that allowed me to pay off more than $12,000 in debt on a modest income in just two years. 

Personal loan eligibility criteria vary by lender, but most traditional lenders look for: 

  • Good credit (around 670 or higher). 
  • Stable income. 
  • Low debt-to-income ratio. 

Consolidating debt with a personal loan offers benefits like a single monthly payment, fixed interest rate, and potentially lower rates. 

Here's how to find the best terms: 

  • Shop multiple lenders and loan offers. 
  • Compare eligibility criteria. 
  • Understand all loan features and fine print. 
  • Look for promotional offers. 

Personal loans are a popular alternative to traditional debt consolidation loans. At Advance America, we offer a variety of quick and convenient personal loan options, such as Installment Loans and Lines of Credit, that can help you consolidate debts. 

Best of all? You don’t need good credit to get approved for an Advance America loan. 

Credit card balance transfer 

Credit card balance transfers involve moving high-interest balances to a single card with lower rates or promotional offers. Here's how it works: 

  • Step 1: Choose a balance transfer card with a low or 0% introductory APR
  • Step 2: Apply for the card and wait for approval. 
  • Step 3: Transfer balances online, through the app, or by phone. 
  • Step 4: Wait a few business days for the transfer to process. 
  • Step 5: Confirm the transfer and check both old and new accounts. 

Fees typically range from 3% to 5% of the transferred amount, which is added to the new balance. Promotions like 0% APR for 12 to 18 months can save interest and help you pay down debt quickly. 

A balance transfer credit card won’t help you if you don’t use it wisely, so there are some things to keep in mind: 

  • Avoid financing new purchases. 
  • Make timely payments to maintain your credit score. 
  • Pay off the balance before the introductory period ends to avoid regular APR interest rates. 

Home equity loan 

Homeowners can use a home equity loan to consolidate debt, but it's essential to understand how it works and the associated risks. Here's what you need to know: 

  • Requirements include at least 15% to 20% equity in your home, a good credit score (typically 620 or higher), stable income, and a low debt-to-income ratio. 
  • Home equity loans entail risks such as fees, variable interest rates, potentially reduced profit upon selling, and the risk of foreclosure. 

You should consider whether your debt situation warrants tapping into home equity, exploring alternative options like personal loans or balance transfer cards, and assessing your comfort level with foreclosure risk. 

Evaluate your circumstances carefully to determine if a home equity loan may be a good option, or if you’re better off looking into other financial solutions for streamlining debt. 

How to qualify for debt consolidation 

To qualify for a traditional debt consolidation loan, borrowers must meet specific criteria, including credit score, income stability, debt-to-income ratio (DTI), and debt limits. Here's a breakdown: 

  • Credit score: Lenders typically prefer a credit score of 670 or higher, although this factor may vary. 
  • Stable income: Lenders are reassured by proof of a steady income, usually demonstrated through pay stubs, tax returns, or bank statements. 
  • Debt-to-income ratio (DTI): Lower DTI percentages increase approval chances, though some lenders will work with borrowers with higher DTIs. 
  • Debt limits: High debt amounts pose a greater risk to lenders, so your total debt will influence loan terms and rates. 

These requirements vary by lender, so don’t be discouraged if you’re low or high in certain areas. Some lenders work with borrowers at every credit level, so there’s a good chance you’ll find one that will work with you! 

Can I make myself more eligible for debt consolidation? 

To improve your eligibility for a debt consolidation loan and improve approval chances, follow these tips at least six months before applying: 

  • Improve your credit score by paying bills on time, reducing balances, and correcting any errors on your credit report. 
  • Maintain stable income by staying in your current job and avoiding new debt. 
  • Lower your debt-to-income ratio (DTI) by reducing outstanding balances using strategies like the Debt Snowball method
  • Use online tools to compare consolidation loans from various lenders, considering rates, terms, fees, and the fine print. 
  • Prepare necessary documentation in advance to expedite the application process. 
  • Be prepared to address any red flags in your credit history and state your commitment to financial responsibility. 

Taking these proactive steps can enhance your appeal to lenders and increase your chances of loan approval. 

Can debt consolidation hurt your credit score? 

Debt consolidation's impact on your credit score can be positive or negative depending on how well you manage repayment. Here's how to navigate potential changes: 

  • Improve your credit utilization ratio (CUR): Paying down debt reduces CUR, improving your score. Keep old accounts open to maintain available credit. 
  • Limit hard credit inquiries: Avoid too many credit inquiries by researching and selecting the best loan option upfront, preventing unnecessary score drops. 
  • Maintain a diverse credit mix: Having several different credit types in your name looks better to creditors. 
  • Demonstrate creditworthiness: Consistent, on-time payments and responsible credit use demonstrate your reliability and ability to repay. 
  • Create a repayment plan. Stick to it to demonstrate financial responsibility, ultimately bolstering your creditworthiness. 

Find out if debt consolidation is right for you 

If managing your monthly debt feels like wrestling an octopus, debt consolidation can help you regain control over your finances by streamlining multiple payments into one. It can also save you money over time with a lower interest rate or allow you to pay off debt faster. Make sure your debt situation isn’t one where consolidation isn’t recommended, carefully research your debt consolidation options, and only apply with a trusted lender. 

At Advance America, we’re happy to work with you to see if any of our personal loans can help you consolidate your debt into one convenient monthly payment. Remember, you don’t need great credit to get approved. 

Visit your local Advance America today or start your application now.

About the Author

Bree Ewers has contributed to Advance America since 2023. Writing from her home office in Portland, Oregon, she shares a relatable perspective on the financial triumphs and challenges many readers face.

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