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Daniel Cohen
UpdatedJun 19, 2024
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    5 min read
Key Takeaways:
  • A personal loan is an unsecured loan paying off several existing loans.
  • A second mortgage or cash-out refinance adds equity to your home loan.
  • Credit counseling and debt settlement sound similar, but consolidate debt in very different ways.

Consolidation at a Glance

Consolidation is a word with many meanings in the debt world.

The dictionary defines consolidation as combining separate components into a single, larger whole. However, in the debt world, consolidation can mean four very different ways to handle overwhelming debt:

  • A personal loan: An unsecured loan that pays off several existing loans with one loan. This one loan has one payment instead of two or more. Sometimes the term (the length) of a personal loan is longer than the existing loans, which results in a smaller monthly payment.
  • A second mortgage or cash-out refinance: Like a personal loan, a debt consolidation loan using second mortgage or cash out refinance combines several loans into either a second mortgage or adds equity to your existing home loan.
  • Credit counseling: After enrollment, the debt management company contacts each creditor, which are usually credit card companies, and negotiates a lower interest rate. You make monthly payments to an escrow account handled by the debt management company, which then distributes the funds to creditors. The typical debt management plan lasts for 5 years, and repays the balances of all debts in full.
  • Debt settlement: An aggressive program that appears similar to credit counseling at first glance, but has significant differences. Like credit counseling, a person in a debt settlement program makes monthly payments used to resolve the person’s debts. However, unlike credit counseling, the payment is not distributed to all creditors immediately. Instead, the monthly payments are deposited into a special bank account. Over time, the debt settlement company negotiates final settlements for each debt for less than the debt’s balance.

Which Consolidation Option is Best?

The short answer to, "Which Debt Consolidation Option is Best?" is, "All of them!" It is also, "None of them!" This confusing answer is not meant to be silly, but to make a point: The best solution depends on your circumstances and goals. Here are the major factors that will go into choosing the best consolidation for you:

  • Do you have a 700+ credit score today? If so, how important is it for you to keep a high credit score?
  • Do you own a home? If so, do you have equity in your home?
  • Can you afford a payment of 3% or more of your consumer debt each month?
  • Given the choice between short time to debt freedom or keeping a high credit score, which is more important to you?
  • Is all or part of your debt a student loan?

It can be frustrating to look for consolidation help because different people place different values on each of these factors. Let us look at some of these factors in this consolidation guide.

Credit Score

The credit score most creditors use is FICO. FICO scores range from 300 to 850. The other is Vantage Score, which ranges from 501 to 990. If your FICO score is already in the 500s or below, or your Vantage score is in the 600s or below, then it is likely that late payments or other negative events have damaged your credit score. Therefore, choosing a consolidation option that damages your credit score should not be a big concern for you.

However, if your FICO score is 700 or above, and you plan to apply for a home or car loan soon, then make your consolidation choice with care.

Home Ownership

Before the collapse in home prices in 2008, few homeowners were upside-down on their home loans. Most people didn’t know that "upside-down" or "under water" could refer to a home loan. It’s true many homeowners struggle with upside-down home loans today, but keep in mind that according to the US Census, about one-third of all 75 million US homes are owned outright. About 50 million homes have mortgages, and about 25% of those are under water. This means that more than 80% of US homes are not upside down.

This means that a home equity loan or cash-out refinance to consolidate loans is still a viable option for many homeowners.

However, consolidating your unsecured debt into secured debt can create a serious problem if, in the future, you cannot pay your home loan. In a worst-case scenario, an unpaid home equity loan can result in a foreclosure.

On the other hand, home equity loans and home loan refinances are available at very low interest rates, and are much lower than rates for credit cards. But looking at the interest rate can be misleading because the length of most home loans is 15 or 30 years. Therefore, a low-rate loan over 30 years could cost a borrower more in interest expenses than a high-rate loan that lasts a short time.


We already discussed the risk of a home equity loan and cash-out refinance. Both debt settlement and credit counseling have risks, too.

In a debt settlement program, the consumer stops paying their creditors, and instead make monthly payments into a special account that will be used later to resolve the debts for less than the balance owed. There is a risk the creditor may choose to file a lawsuit against the consumer. Most creditors do not, and instead would rather avoid the expense of litigation and negotiate a settlement. Before hiring a debt settlement company, be sure to ask what type of legal assistance it offers to customers sued by creditors.

Credit consolidation programs do not offer a legal risk, but have a low completion rate. This is perhaps due to the high monthly cost of a credit counseling plan, and the customary 5-year length of credit counseling plans.


Consolidation is a tricky word because different people use it to mean different debt resolution programs. It can be a personal or mortgage loan, credit counseling, or debt settlement. Use the no-cost, no-nonsense Debt Coach for a personalized, online analysis of your situation.

Struggling with debt?

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q1 2024 was $17.69 trillion. Auto loan debt was $1.62 trillion and credit card was $1.12 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.

The amount of debt and debt in collections vary by state. For example, in Tennessee, 32% have any kind of debt in collections and the median debt in collections is $1892. Medical debt is common and 18% have that in collections. The median medical debt in collections is $888.

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.