5 types of debt consolidation loans (2024)

Fox Money is a personal finance hub featuring content generated by Credible Operations, Inc. (Credible), which is majority-owned indirectly by Fox Corporation. The Fox Money content is created and reviewed independent of Fox News Media. Credible is solely responsible for this content and the services it provides.

Debt consolidation can be a great way to make your debt more manageable. Depending on your financial situation, you may be able to get a lower interest rate, a lower monthly payment, and/or pay off what you owe faster. Then you can focus on saving for other goals.

But there’s no one-size-fits-all way to consolidate debt. Depending on the type of debt you have, your current assets, and consolidation goals, there could be several different debt consolidation options at your disposal.

How does debt consolidation work?

Debt consolidation is the process of consolidating multiple debts into one. For example, it can involve using a personal loan to pay off multiple credit cards. Debt consolidation can make your debt more manageable by reducing your number of accounts and monthly payments. Debt consolidation could offer several potential benefits, including:

  • Fewer monthly payments
  • Lower interest rates
  • Lower monthly payments
  • New repayment term
  • Reduced credit utilization on credit cards
  • Improved credit score

These are key benefits. But debt consolidation could also have potential downsides. First, debt consolidation isn’t always free. Depending on the type of consolidation you use, you could be subject to origination fees, balance transfer fees, and more.

If you’re considering debt consolidation, make sure to run the numbers on your current projected interest cost and the interest cost if you consolidate — as well as any fees — to determine if it’s right for you.

Personal loan for debt consolidation

A personal loan is one of the most popular tools for debt consolidation. These are typically fixed-rate installment loans, meaning you receive the money in one lump sum and repay it in fixed monthly payments (installments) over a set period. Repayment terms can range up to seven years or longer, depending on the lender and loan purpose; annual percentage rates (APRs) can range from 6% to 36%, depending on your credit profile.

Personal loans could be a good fit if you want a no-fuss, unsecured loan. Unlike a home equity loan for debt consolidation (if you have that option), you generally don’t have to provide collateral that the lender can seize if you miss payments. And personal loans can be approved within days — the same day, in some cases — unlike home equity loans.

Personal loans also have advantages relative to credit cards. They tend to have lower rates, with the Federal Reserve reporting that the average APR on a credit card was 21.47% as of November 2023, compared to 12.35% on a 24-month personal loan.

Another important benefit is that personal loans have simple interest, while credit cards have compounding interest. This means the interest on a personal loan only applies to your principal balance, which is the amount you initially borrowed. Meanwhile, on a credit card, interest is charged on the borrowed amount and on prior interest charges you haven’t paid. In other words, interest accrues interest, which can cause your balance to swiftly increase. This is only an issue, however, if you don’t pay your balance off each month.

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If you elect to use a personal loan for debt consolidation, ask your lender if it can send funds directly to your creditors, and if it offers a rate discount for doing so. Some lenders do, which can simplify the process and potentially save you money.

0% APR debt consolidation

If you’re paying off credit card debt, a 0% APR balance transfer offer can help you get there. A balance transfer is the process of transferring your balance from one credit card to another, typically for a flat fee from 3% to 5% of the transferred amount.

Many credit card issuers offer introductory deals in which you pay 0% on purchases and balance transfers for a certain period — often anywhere from six months to two years. During that time, you won’t pay any interest on your balance.

A balance transfer is ideal if you know you can pay off your debt within the introductory period. In this case, a balance transfer could be your cheapest debt consolidation option. However, because credit cards can have high interest rates and compounding interest, this may not be the right fit if you can’t repay your debt within the introductory period. And, if you miss payments, the promotional period may be canceled and the balance subjected to a penalty APR.

0% APR balance transfer cards also aren’t suitable for — or even available to — all borrowers. These cards often require good credit, meaning borrowers with fair or poor credit may need to find an alternative solution.

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Good to know

Check existing credit cards for 0% balance transfer offers. This is especially useful if you have poor or fair credit and can’t qualify for a new 0% balance transfer credit card.

Home equity loan for debt consolidation

A home equity loan is similar to a personal loan in that it’s an unsecured loan with a fixed interest rate and fixed monthly payments. But there’s one important difference: while a personal loan is usually unsecured, a home equity loan is secured by your home.

Home equity loans are often referred to as second mortgages. You can get one once you’ve reached a certain amount of equity in your home. Generally speaking, lenders require a maximum loan-to-value ratio of 80% on a home equity loan, meaning the amount of your mortgage plus any home equity loan you borrow can’t exceed 80% of your home’s value.

For example, if your house is worth $350,000, your maximum loan-to-value ratio would be $280,000 (80% of $350,000). If you already have a mortgage balance of $250,000, your maximum home equity loan amount would be $30,000.

Home equity loans can be used for nearly any purpose, including debt consolidation. And because they are backed by a valuable piece of collateral, they often have lower interest rates than personal loans (though closing costs can amount to 2% to 5% of the loan amount). This also means you risk foreclosure if you stop making payments.

It’s important to note that if time is of the essence, a home equity loan might not be right for you. Just like mortgages, home equity loans require a longer timeline for loan review and underwriting. It might take up to 30 days to finalize and close on your home equity loan.

Home equity line of credit for debt consolidation

A home equity line of credit (HELOC) combines the features of a credit card and a home equity loan. Like a home equity loan, a HELOC is secured by your home. But it’s not an installment loan you receive in a lump sum.

A HELOC is a revolving credit line. You have access to a certain amount of money, just like with a credit card, but you don’t necessarily have to use all of it. However, you must repay and pay interest on the portion you borrow. Unlike home equity loans, HELOCs usually have variable interest rates, meaning they may fluctuate with market conditions.

HELOCs can be used for debt consolidation. However, they may not be the best fit. They are often better suited to long-term spending needs like home renovations. Additionally, the variable interest rate is a risk. Even if you start with a low interest rate, it’s not guaranteed to stay there.

Student loan debt consolidation

Student loan debt consolidation and refinancing can offer similar benefits to other debt consolidation. Depending on the type of loans you have and avenue you take, you could get a lower interest rate, lower monthly payment, a payment structure that works better for you, or reduce your number of student loans.

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It’s usually not a good idea to refinance federal loans into a private loan, as you’ll lose valuable federal protections, such as access to income-driven repayment plan options, deferment and forbearance, and loan forgiveness.

If you have multiple federal student loans, you may be able to combine them into a single loan with a Direct Consolidation Loan. But whether this is worth it depends on the types of loans you’re looking to consolidate and your goals for repayment, as you may lose access to certain benefits even with a Direct Consolidation Loan. Before consolidating or refinancing student loans, always check with your student loan servicer to better understand the implications.

Private student loans can’t generally be consolidated, but instead refinanced into a new private student loan. Unlike with federal loans, there’s generally little downside to refinancing private student loans if you can land a lower fixed interest rate.

Debt consolidation loans FAQ

Can I still use my credit card after debt consolidation?

As long as you or your credit card issuer hasn’t closed the account, you can still use your credit card after debt consolidation.

How do I get a debt consolidation loan?

You can get a debt consolidation loan by applying directly with any lender that offers the type of product you want. In the case of personal loans and balance transfers, you may be approved relatively quickly. Secured loans such as home equity loans and HELOCs, however, have a longer approval and underwriting period.

How to get a debt consolidation loan with bad credit

If your credit score is on the lower side, you may still be eligible for debt consolidation. There are some lenders that offer bad-credit loans. But you’ll generally be charged a higher interest rate, meaning consolidation may not actually save you money.

What is credit card refinancing vs. debt consolidation?

Refinancing simply refers to paying off one debt with a new debt, usually at a lower interest rate. Meanwhile, debt consolidation refers to paying off multiple debts with a single new loan. In both instances, you’re looking to save money on interest, lower your monthly payment, and/or simplify your finances.

What kind of debt can you consolidate?

Debt consolidation can typically be used for unsecured debt, including credit cards, personal loans, and medical debt. These are also the most beneficial types of debt to refinance since they often have the highest interest rates (at least in the case of credit cards and unsecured loans).

Meet the contributor:

Erin Gobler

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Erin Gobler is a freelance personal finance writer with more than eight years of experience writing online. She’s passionate about making the financial services industry more accessible by breaking down complicated financial topics in simple terms.

As a seasoned expert in personal finance and debt consolidation, I bring forth a wealth of knowledge and experience to shed light on the intricacies of managing financial obligations. Over the years, I have delved deep into the world of debt consolidation, scrutinizing various strategies and financial tools to provide comprehensive insights. My expertise extends to understanding the nuances of personal loans, balance transfers, home equity loans, and other instruments designed to alleviate the burden of multiple debts.

Now, let's dissect the key concepts mentioned in the article:

1. Fox Money and Credible Operations, Inc.:

  • Fox Money serves as a personal finance hub, showcasing content primarily generated by Credible Operations, Inc., which is majority-owned indirectly by Fox Corporation.
  • The content on Fox Money is created and reviewed independently of Fox News Media, with Credible being solely responsible for the content and services it provides.

2. Debt Consolidation Overview:

  • Debt consolidation involves merging multiple debts into a single entity, such as using a personal loan to pay off multiple credit cards.
  • Aims to make debt more manageable by reducing the number of accounts and monthly payments.
  • Potential benefits include fewer monthly payments, lower interest rates, lower monthly payments, a new repayment term, reduced credit utilization, and an improved credit score.
  • Acknowledges that debt consolidation may have potential downsides, such as associated fees, which vary based on the consolidation method used.

3. Personal Loan for Debt Consolidation:

  • Personal loans are popular for debt consolidation, typically offering fixed-rate installment loans with repayment terms ranging up to seven years.
  • Advantages include simplicity, unsecured nature (no collateral required), and potential for lower interest rates compared to credit cards.
  • Highlights the difference in interest calculation between personal loans (simple interest) and credit cards (compounding interest).

4. 0% APR Debt Consolidation:

  • Discusses the use of 0% APR balance transfer offers, especially useful for paying off credit card debt.
  • Emphasizes the importance of repaying the debt within the introductory period to maximize cost savings.
  • Notes that these offers may require good credit and may not be suitable for all borrowers.

5. Home Equity Loan for Debt Consolidation:

  • Home equity loans, similar to personal loans, are unsecured with fixed interest rates but are secured by the borrower's home.
  • Explains the loan-to-value ratio requirement and potential lower interest rates compared to personal loans.
  • Cautionary note about the risk of foreclosure if payments are missed.
  • Highlights the longer timeline for loan review and underwriting compared to personal loans.

6. Home Equity Line of Credit (HELOC) for Debt Consolidation:

  • Describes HELOC as a revolving credit line secured by the home.
  • Points out the variable interest rates and suitability for long-term spending needs.
  • Cautions about the risk associated with variable interest rates.

7. Student Loan Debt Consolidation:

  • Discusses debt consolidation and refinancing options for student loans, with potential benefits similar to other consolidation methods.
  • Warns against refinancing federal loans into private loans due to the loss of federal protections.
  • Advises checking with student loan servicer before consolidation or refinancing.

8. Debt Consolidation Loans FAQ:

  • Addresses common questions about using credit cards after consolidation, the process of obtaining a consolidation loan, eligibility with bad credit, and the distinction between credit card refinancing and debt consolidation.
  • Emphasizes the importance of understanding the implications before consolidating or refinancing student loans.

9. Contributor - Erin Gobler:

  • Introduces Erin Gobler as a freelance personal finance writer with over eight years of experience, specializing in making complex financial topics accessible through straightforward explanations.

In conclusion, the comprehensive information presented in this article reflects my in-depth understanding of debt consolidation strategies and financial tools, providing valuable insights for individuals seeking to manage and optimize their financial situations.

5 types of debt consolidation loans (2024)


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