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Top Ways to Consolidate Debt

Top Ways to Consolidate Debt
Betsalel Cohen
UpdatedNov 29, 2023
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    5 min read
Key Takeaways:
  • Consolidate debt into an affordable monthly payment.
  • Debt consolidation loans help you pay off debt quicker.
  • Choose a debt consolidation tactic that fits your budget and financial goals.

Consolidate debt to improve your finances

Should you consolidate debt? And, if so, how should you consolidate your debt. That is a popular question, and there is no one easy answer. There are a lot of types of debts, and each household has a unique financial situation.

Some experts will tell you not to take out a debt consolidation loan. Others will tell you not to use a debt relief program, stop doing balance transfers, and don't transfer the unsecured debt to a mortgage loan. The funny thing is that they are right for some people and wrong for other people.

It is crucial to understand that there is no one-size-fits-all approach to consolidating debt. The most important thing to keep in mind is that you want to find a debt consolidation program that lets you achieve your financial goals.

Benefits to consolidate debt

Everyone has a slightly different reason to consolidate their debt. The common ground is that anyone consolidating debt wants to find an affordable payment. For some, that means increasing the monthly payment, and for others, a lower payment.

Here are the significant benefits to consolidate debt:

Simplify payments: Instead of having many bills to pay, you create one monthly payment. Remember, making your monthly payments on time is crucial to maintaining a good credit score.

Save money: Consolidating debt into a lower interest rate means saving money. If you can afford more significant payments, then you save even more money. If you have good to excellent credit, then a debt consolidation loan or a credit card balance transfer can lower your rates and save you money. However, if you are struggling with your payments, look for a debt consolidation program that offers payment relief. A debt management plan or debt settlement program can reduce your overall financial costs and get you out of debt.

Pay off debt quicker: Most debt consolidation plans allow you to create a structured payment schedule and pay off your debt between 3-5 years.

Lower monthly payments: If you are struggling or in financial hardship, then the most important benefit from a debt consolidation program is a lower monthly payment. Suppose you have sufficient equity in your home. In that case, you can consolidate debt with a long-term home equity mortgage, cash-out refinance, or HELOC. If you don't have a home, then a principal reduction program or a debt management plan can lower your monthly payments.

Five scenarios to consolidate debt

Here are three scenarios to help you understand how consolidating debt is beneficial. The first two scenarios are for people with good to excellent credit. The third scenario is for someone with low to fair credit and in financial hardship.

Scenario #1 - Saving money with a balance transfer

If you have several high-interest credit cards, then a balance transfer offers you money to consolidate your cards into one monthly payment. This solution is excellent if you are disciplined, don't run up new debt, and pay off your debt during the introductory period when the interest rate is at 0%. Balance transfers require excellent credit and are limited to about $15,000.

Scenario #2 - Getting organized and save with a debt consolidation loan

A debt consolidation loan offers two benefits. First of all, you set up a payment plan to get out of debt. Most loan programs are for three to five years. A debt consolidation loan is only advisable if you get a lower interest rate. Combining an aggressive payment plan with low-interest rates is the best way to consolidate debt.

Scenario #3: Lower your payment with a Cash-Out Mortgage or Home Equity Loan (HEL):

Suppose you have extra equity in your home and want to reduce your monthly payments. In that case, you can consolidate your debt by taking a cash-out refinance or a Home Equity Loan. Your best choice will depend on whether the new interest rate will save sufficient money to warrant doing a cash-out mortgage refinance. If not, you can consolidate your debt by taking out a HEL. Using home equity to consolidate debt can protect your credit, improve your cash flow, and reduce your debt stress. However, since the payback period on home loans will lengthen your loan time, you will not get out of debt quickly, and it won't be at the lowest cost.

» SUGGESTED: Get a home equity or cash-out refinance rate quote.

Scenario #4: Lowering your interest rate and monthly payment with a debt management program

If you need slightly lower monthly payments, then a credit counseling and debt management plan can consolidate your monthly payment. A DMP program can help by reducing your interest rates on your credit cards. Instead of making payments directly to your creditor, the DMP company collects your money. It pays off the creditors at a negotiated rate, simplifying your monthly payment and reducing your debt stress. It is a middle of the road approach, helping you get out of debt quicker, reduce your financial costs, and cause slight harm to your credit.

Scenario #5 - Getting back on your feet with a principal reduction program

If you are in financial hardship and struggling with your monthly payments, you need to find a debt relief program. A debt settlement company negotiates your debt with your creditors. You stop making payments directly to your creditor. The missed payments will lower your score, but the damage will be less severe if you already have a low credit score. This debt consolidation program is for people with financial hardship. If eligible, it will free up cash and help you get out of debt faster at a low rate. However, this will be at the expense of a damaged credit, which is generally not an issue for people in financial hardship. Also, your creditors may pursue legal actions, including collection calls and lawsuits.

Struggling with debt?

If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q2 2023 was $17.06 trillion. Student loan debt was $1.569 trillion and credit card debt was $1.031 trillion.

A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.

Collection and delinquency rates vary by state. For example, in Oregon, 15% have student loan debt. Of those holding student loan debt, 8% are in default. Auto/retail loan delinquency rate is 2%.

To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.