Debt Consolidation Basics

Key concepts

• Debt consolidation loan: a new installment loan used to pay off several existing debts. You then make one fixed payment each month.
• Balance transfer card: a credit card that allows you to move existing balances, often with a temporary low or 0% interest rate.
• Home equity products: options like a home equity loan, HELOC, or cash-out refinance that use your home as collateral to pay off other debts.
• Total cost: the real measure of whether consolidation helps is how much interest and fees you pay over the life of the debt, not just the monthly payment.

When debt consolidation might make sense

• You have several high-interest debts (for example, credit cards) and qualify for a lower overall interest rate.
• You prefer one predictable monthly payment instead of managing multiple due dates.
• You have a stable income and a realistic plan to avoid building new debt while you pay off the consolidated balance.
• You understand the fees (origination, balance transfer, closing costs) and they do not wipe out the potential savings.

Common debt consolidation options

1. Personal debt consolidation loan

You take out a new personal loan, usually with a fixed rate and term, and use it to pay off your existing credit cards or other debts.

• One fixed payment and a clear payoff date.
• May lower your interest rate if your credit profile improved.
• Watch for origination fees and make sure the rate and term actually reduce your total interest cost.

2. Balance transfer credit card

You move existing balances to a card that offers a low or 0% introductory rate for a limited time.

• Can be effective if you can pay off the balance before the promotional period ends.
• Usually includes a balance transfer fee, often a percentage of the amount transferred.
• If you do not pay it off in time, the remaining balance may be charged at a much higher rate.

3. Using home equity

Options such as a home equity loan, HELOC, or cash-out refinance can offer lower rates because your home is used as collateral.

• Monthly payment may be lower, but your debt is now secured by your home.
• Missing payments could put you at risk of foreclosure, so this approach requires extra caution.
• Closing costs and fees can be significant; compare carefully before deciding.

Before you consolidate: quick checklist

• List all your current debts, interest rates, minimum payments and remaining balances.
• Compare at least two or three consolidation options, including the total cost over time.
• Check fees carefully (origination, transfer, closing costs) and include them in your comparison.
• Create a written plan so you do not rebuild balances on your credit cards after consolidating.
• If your situation feels overwhelming, consider speaking with a reputable nonprofit credit counseling agency.