Definition
Debt consolidation is the process of combining multiple debts into a single loan or payment, typically with the goal of securing a lower interest rate, lower monthly payment, or both. This strategy simplifies debt management by replacing multiple payment deadlines with a single due date and potentially saves money through reduced interest rates. Common debt consolidation methods include personal loans, balance transfer credit cards, home equity loans or lines of credit, and debt management plans.
Frequently Asked Questions
Is debt consolidation a good idea?
Debt consolidation can be beneficial if: (1) You qualify for a lower interest rate than your current debts; (2) You have a reliable income to make payments; (3) You're committed to not accumulating new debt; and (4) The monthly payment is affordable. However, it may not be suitable if you have poor credit (resulting in high interest rates), a small amount of debt that could be paid off quickly, or if you haven't addressed the spending habits that led to the debt.
What's the difference between debt consolidation and debt settlement?
Debt consolidation involves combining multiple debts into a single loan that you repay in full, potentially with a lower interest rate or monthly payment. Your credit score might improve over time with on-time payments. Debt settlement involves negotiating with creditors to accept less than the full amount owed to consider the debt satisfied. Settlement typically requires you to stop making payments, significantly damages your credit, and may have tax implications.
Related Terms
Need Credit Help?
Discover tools and resources to help improve your credit score and financial health.