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Consolidate Debt

How Does Debt Consolidation Work?

Simply put, debt consolidation is the process of combining multiple debts from different creditors into one payment.

There are a few different ways you can accomplish this:

  • Personal loans
  • Balance transfers
  • Home equity loans
  • 401(k) loans

Debt consolidation is a common reason people consider taking out personal loans, according to a recent Discover survey. And the use of personal loans, generally, has been on the rise, as they provide relatively quick access to funding with no collateral (i.e., your house) necessary.

Why Consolidate Debt?

One reason to consolidate debt is just to simplify finances. If, for example, you have high interest credit card debt on multiple cards, with multiple payment dates, just keeping it all organized can be difficult. To say nothing of getting the money together.

Another important reason is that you can actually save money by consolidating debt.

Our infographic breaks down a debt consolidation savings example based on the average U.S. household:

how debt consolidation works infographic

 

Should You Consolidate Debt?

As you can see above, you could save thousands of dollars by consolidating debt.

So is it the right move for you?

A report from USA Today points out some useful things to keep in mind for a successful consolidation strategy.

You should have the following characteristics before you consolidate debt:

  • Good credit so you can get a lower interest rate on a loan than what you’re currently paying
  • Enough money coming in to cover payments on a debt consolidation loan
  • An amount of debt that’s not more than 50% of your income
  • A plan for staying out of debt in the future

If, however, you feel you don’t have the ability to pay off the debt, even at a lower interest, you may want to consider credit counseling.

Also, if the amount you owe is a small amount – say $2,000 or less – it may not be worth it to take on a loan. You could consider different methods such as the snowball or avalanche strategies to begin paying down your debt.