What is Debt Consolidation and How Can it Help My Finances?


Debt consolidation is the process of combining all of your outstanding credit balances into one consolidated debt. The borrower still owes money to the new creditor, but having one monthly payment as opposed to multiple payments can make budgeting and managing expenses easier.


If you use credit, you might have more than one outstanding debt; credit cards, lines of credit and personal loans are common in the United States. Sometimes, having multiple monthly bills can make it harder to save money and get ahead financially or to become completely debt free.


Debt consolidation is an option for people looking to strategically pay down credit balances, save money on interest and/or simplify their monthly payments. It’s an alternative to more drastic financial relief measures such as bankruptcy.


Depending on your credit score, type(s) of outstanding debt and method of consolidating credit, you may also you may also qualify for a lower APR (annual percentage rate) in the process. When a debt consolidation loan offers a lower interest rate than some or all of your current debts, it has the potential to reduce the amount of interest you will end up paying. However, you’ll need to consider the duration of the loan as well as the interest rate to determine whether your total amount repayable will be more or less. Remember that the longer the duration of the loan, the more interest you will pay in total.


Common Debt Consolidation Methods and Sources

Credit Card Balance Transfer

If you have a higher credit score, you might qualify for balance transfer credit cards which typically have an introductory period with a low or zero percent APR. You’d then transfer your other credit card balances to the new card. However, you’d need to pay off your balance in full during the introductory period, otherwise you’d continue to accrue interest on the unpaid debt.


Personal Loan Debt Consolidation

Personal loans are available from a wide variety of sources, like banks, credit unions, online lenders and peer-to-peer networks. Your creditworthiness determines the actual products, rates and terms that lenders extend to you. For example, borrowers with exceptional credit scores may qualify for loans with lower APRs than those with poor credit scores. Additionally, borrowers with poor credit scores might have a harder time securing a bank loan, which usually have lower rates. Online lenders typically serve a broader customer base than traditional banks and credit unions, including those with less-than-perfect credit.

If you choose a personal loan for debt consolidation, look for a lender that doesn’t charge an early repayment fee. You want the ability to pay more than your minimum monthly payment, if possible — it could help you save on interest and shorten the amount of time it takes to repay your loan. It’s another way you can be in control of your loan and personalize it to your needs.


Personal Network Debt Consolidation 

Sometimes, your personal network, family and/or friends can provide an informal loan. These agreements may or may not involve a promissory note or specific repayment terms, such as interest. However, personal network loans may be unregulated without proper legal documentation. Borrowing money from your personal network may also cause strain in the relationship.


Third-Party Debt Consolidation Agencies

A third-party debt consolidation agency may be another option for some people. These agencies vary, but they typically negotiate with creditors on behalf of the borrower for a lower APR and/or monthly payment.

No matter which method you choose, make sure to carefully review all terms and conditions before committing. It’s important that you fully understand and can handle your financial responsibilities.


Let’s examine two sample journeys through debt consolidation, and what can happen as a result. Keep in mind that these figures are only meant for illustrative purposes.

debt consolidation example

Here’s what you need to know about Danielle’s finances:

  • She has a good credit score of 680.
  • Credit balances include: One-year term personal loan of $3,000 with 39% APR and two credit cards with 20% APR — both at their $3,000 limit.

To pay off both of the credit cards, Danielle would need to pay a minimum monthly payment of $240 for the next 120 months.1

To pay off the loan, she’d need to make a minimum monthly payment of $305.90 for 12 months.2

Danielle has three monthly bills, and their minimum payments total $545.90.

Because she wants a lower monthly payment, Danielle decides to take out a personal loan to consolidate their credit. The $9,000 personal loan has a six-year term at 40% APR has a $331.25 total payment, so Danielle lowered their monthly payments and will be debt-free at the completion of the loan repayment.2


debt consolidation example

Here’s what you need to know about Sean’s finances:

He has a fair credit score of 650.

  • Credit balances include: Personal loan of $2,000 with 50% APR and a two-year term and two maxed out credit card balances of $2,000 at 22% APR.

In order to pay off the credit cards alone, Sean would need to pay a minimum monthly payment of $160 for the next 110 months, and would end up paying $3,012.34 in interest in that time.1

To pay off the loan, Sean would need to make a minimum monthly payment of $133.42 for 24 months.2

Sean has three monthly bills to juggle, on top of his new car payment, and their total minimum loan and credit card payments total $293.42.

Because Sean wants to pay off all his debts and still have a manageable monthly payment, he decided to take out a five-year $6,000 personal loan at 50% APR with a $273.63 monthly payment to consolidate all outstanding debts. Now that he only has one monthly payment for personal debt, budgeting between paychecks is easier. Without taking on any new debts, they’ll be debt-free in five years.2




The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.



1Greenpath. (n.d.). Credit card minimum payment calculator. Retrieved December 26, 2019, from https://www.greenpath.com/calculators/DebtPayoff2.html

2Bankrate.com. (n.d.). Loan calculator. Retrieved December 27, 2019, from https://www.bankrate.com/calculators/mortgages/loan-calculator.aspx


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