Managing Debt

Debt consolidation options Q&A

Couple discussing their debt consolidation options and how they should go about it.

Debt consolidation loans can be a great option for managing your debt, especially if you have a lot of high-interest unsecured debts that overwhelm you.

Below, we’ve listed the answers to some of the most commonly asked questions about debt consolidation options for loans.

What is debt consolidation?

Debt consolidation rolls several debts into one lower-interest payment. It’s a strategy you can use to reduce your total debt and reorganize it to help you pay down your debt.

Although there are several types of debt consolidation methods, a debt consolidation loan is the most common one.

What is a debt consolidation loan?

A debt consolidation loan involves taking out a new loan to pay off one or more debts you already have. It allows you to bundle your debts with a loan that features one manageable monthly payment at a lower interest rate. To qualify for a debt consolidation loan, you will likely need good credit.

What types of debts can you consolidate?

You can use debt consolidation to merge a variety of debts, including credit cards, personal loans, medical debt, auto loans, student loans, and payday loans. Virtually any debt is eligible for debt consolidation. Due to credit card regulations, there are limitations on a given lender’s ability to pay off credit card accounts with the proceeds of a loan from the same lender.

For example, Discover® Home Loans cannot directly pay off a Discover Card account with a home equity loan or mortgage refinance that Discover originates. However, we can provide you with a cash out to use as you choose.

How do debt consolidation loans work?

To consolidate your debts, you take out a debt consolidation loan (typically either through a home equity loan or a personal loan) to pay off your current debts.

A good debt consolidation loan helps you in two ways: it spreads out your debt repayment over the life of the loan (which usually ranges from 5 to 30 years) or it reduces the interest you are paying on the debt.

By lengthening your repayment term and reducing your interest rates, you should see lower monthly payments on your debt and will only need to manage one bill payment each month.

Can you use your home equity to consolidate debt?

Yes. In fact, debt consolidation is a common reason why homeowners take out home equity loans. Whether you use a traditional home equity loan or a home equity line of credit (HELOC) to consolidate debt, you’ll enjoy a single payment, lower interest rate, and the peace of mind of knowing when your debt will be paid off.

Discover Home Loans offers home equity loans ranging from $35,000 to $300,000 with low fixed rates and zero origination fees. With this in mind, debt consolidation with Discover Home Loans can often be a great option.

How to get a debt consolidation loan

A good first step in getting a debt consolidation loan is to understand the current status of your debt: how much you owe and what interest is charged against each debt.

The debt consolidation calculator from Discover Home Loans allows you to list your debts and suggests estimated options to consolidate your debt.

If you own a home, a home equity loan can be a great debt consolidation option to lower your interest rates and spread out your repayment term: see how much your home’s equity can allow you to borrow with the loan amount calculator from Discover.

Use the monthly payment calculator from Discover to see your estimated monthly payments once you have determined if a personal loan or a home equity loan is the best debt consolidation option for you.

If these monthly payments are less than your current minimum monthly payments against your existing debt, then it may be a potential good solution for your debt consolidation needs.

Couple reviewing how to consolidate credit card debt with a home equity loan.

The most noteworthy benefit of a home equity loan as a debt consolidation option is that you will only have to worry about one debt payment every month.

When should you consolidate debt?

There are three main reasons to consolidate your debt:

If you’re having trouble managing all your debt payments, debt consolidation can give you one easy-to-manage payment each month.
Good debt consolidation loans help you secure a low interest rate on your debt, lowering what you pay against the monthly debt.
Many debt consolidation loans also can spread out the repayment term, which can reduce your monthly payments.

What are the advantages of debt consolidation?

The most noteworthy benefit of debt consolidation is that you will only have to worry about one debt payment every month. You may also be able to save big on interest, especially if you have a lot of high interest debt and are able to lock in a lower interest rate with your debt consolidation loan. Finally, debt consolidation can help you to pay off your debt and avoid missed payments, which may help you improve your credit score.

What are the disadvantages of debt consolidation?

The relative benefits of a debt consolidation loan depend on your individual circumstances and actual debt payments. You will save interest on monthly payments when you pay the new, lower interest rate debt monthly in an amount equal to or greater than previous monthly payments towards the higher rate debts being consolidated. Keep in mind, though, while your monthly payments will be lower, in the long term you may pay more interest if the debt is extended.

Also, if you’re having trouble controlling your spending, debt consolidation won’t solve your problem. You may be better off working with a financial planner so you can get to the root of your problem. Debt consolidation loans may also include upfront costs like origination fees and closing costs.

Discover Home Loans does not charge any origination fees or closing costs.

Debt consolidation options and credit

How can you consolidate debt with bad credit?

It may be difficult to get a debt consolidation loan if you have bad credit, however there are other options to help. Debt management, and debt settlement may be able to improve your debt situation without good or excellent credit.

Do debt consolidation loans help or hurt your credit?

Your credit score is mostly dependent on your ability to make on-time payments each month. While a debt consolidation loan can completely pay off your credit cards, the addition of the loan to your credit report will balance that off: leaving you with the same overall amount of debt.

If a debt consolidation loan lowers your monthly payments and makes managing your bills simpler, you may be better able to make your scheduled payments: which may drive your credit score higher. If, however, you continue to add new debts to your account (through credit card use or other loans and bills), a debt consolidation loan may not prevent your credit score from dropping.

Are there debt consolidation options that don’t include loans?

Can debt management consolidate your debt?

Debt management solutions may help you manage your debt, but you will probably not be given a solution that combines all your payments into a single payment.

Debt management involves working with a third-party to design a plan that’ll help you manage your debt and achieve your goal of becoming debt-free. A credit counselor may counsel you and work with your creditors to restructure your debt or help you take better control of it. Debt management may make sense if you’re in a financial position where you can handle your debts but don’t how to do so.

Can debt settlement consolidate your debt?

Debt settlement services may be able to consolidate your debt into a single payment, but more often debt settlement services work with your creditors to find a price point resolution for your multiple debts.

The goal of debt settlement is to convince your creditors to accept less than the total amount of debt you owe. While you can attempt to settle your debt on your own, you’ll likely get better results with a professional debt settlement company. A debt settlement company is well-versed in negotiating with creditors and can make the process less intimidating.

Final thoughts: Home equity loans as a debt consolidation option

While you have several debt consolidation options and methods to explore when trying to manage your debt, a home equity loan might be worth considering if you have equity built up in your home.

Tapping into equity to consolidate debts into one fixed monthly payment is a popular reason why qualified homeowners take out home equity loans. Just remember that a home equity loan is secured by your home, so you run the risk of foreclosure if you can’t keep up with the regular payments.

If you think a home equity loan is the right debt consolidation option for you, apply online with Discover Home Loans to get a low, fixed rate and a monthly payment that fits in your budget.