Everything You Need to Know About Debt Consolidation

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Different due dates, loan types, interest rates, fees — sometimes it feels like your debt should come with a manual. And in the confusion of keeping track of too many loans, you might be feeling the pinch of high interest charges or even late fees.

If so, it might be time to consider debt consolidation: taking out a new loan to replace your current debt.

This debt consolidation cheat sheet includes everything you need to know to decide if debt consolidation is right for you.

What is debt consolidation?

A debt consolidation loan is an unsecured personal loan you take out to combine and replace existing debt.

Debt consolidation loans are most often used to pay off and combine credit cards, personal loans, or other debt. Thanks to a debt consolidation loan, you can:

  • Simplify your payments
  • Avoid high credit card interest rates and save money
  • Transition from a years-long payment schedule
  • Steer clear of monthly payments you can’t afford

Instead, you’ll have a new loan with a new interest rate, new monthly payment, and new payoff date. But you’ll need to carefully choose the right debt consolidation loan terms to progress toward your debt goals.

3 ways you can use debt consolidation effectively

Still wondering how does debt consolidation work? Here are three of the most common and effective ways you can use a debt consolidation loan to improve your financial situation.

1. Get lower interest rates

One of the biggest pros of consolidating debt is the chance to pay less interest.

For instance, maybe you want to consolidate $10,000 of credit card debt. You pay a 14.00% credit card APR, on par with the average rates reported by the Federal Reserve Bank. Meanwhile, personal loan rates average 10.13%.

If you take out a new $10,000 debt consolidation loan at the 10.13% average rate, you’ll save $3,663 over a five-year term. This screenshot of our credit card consolidation calculator shows how the move could affect your monthly payments as well.

However, to consolidate debt to a lower interest rate, you’ll need good credit.

Getting a lower interest rate on a debt consolidation loan might be simple if you’ve improved your credit score since you took out the original loans. But even a borrower with fair or average credit might be able to save if they can consolidate high-interest debt to a lower amount.

The only way to know for sure is to get personalized rate quotes from a few lenders. That can set you on the path to reducing the cost of your interest payments in the long run.

2. Change monthly payments

Consolidating debt also can be a chance to change your monthly payments. First, it can make your life simpler by replacing multiple debt bills with a single, easy-to-track payment.

Many borrowers also can lower their monthly payments by getting a lower interest rate or choosing a longer repayment plan. When debt is straining your budget, a little wiggle room can make a big difference.

On the other hand, some borrowers might actually pay more each month with a debt consolidation loan. Choosing a loan term of two or three years, for instance, probably will mean you’ll pay more than your previous monthly minimums.

3. Adjust your payoff date

Your monthly payments are tied to your debt consolidation loan term — or how long you and the lender agree you have to repay the debt.

The longer your loan term is, the less you’ll pay each month. The shorter it is, the sooner you’ll be out of debt but the more you’ll pay each month.

Your loan term and payoff date also will affect the total interest you pay (or save) over the life of the loan. A shorter term will have higher monthly payments but will help you avoid years of interest charges.

By comparison, a longer term will stretch out the balance and lower your monthly payments but could raise the total interest you pay. In other words, a consolidated loan could cost you hundreds of dollars more than you would have paid if you’d left the original debt alone.

Make sure you do the math to see if it’s worth extending the payoff date on your loan. You can use our student loan payment calculator to play with different loan terms and see how different repayment terms and interest rates could affect your monthly payments.

3 pitfalls you should avoid with debt consolidation loans

Although consolidating debt often makes sense, it isn’t always the best move. Watch out for these three pitfalls.

1. Beware of debt consolidation services

Debt consolidation services promise to help you consolidate your debt. However, they can be costly, and if you’re not careful, you could end up getting scammed.

Fortunately, you don’t need them. There is nothing a debt consolidation service offers that you couldn’t easily do yourself for less or for free. If you decide a debt consolidation loan is right for you, shop around and apply for the loan yourself.

2. Include origination fees in cost calculations

On top of interest charges, many debt consolidation loans also carry origination fees. These fees can range anywhere from 1 to 6 percent of the total loan amount, which can add to your total loan costs.

Origination fees typically are taken out of the loan funds before the lender disburses them to you. For example, you get only $7,600 of your $8,000 loan thanks to a 5 percent origination fee. Plan to borrow enough that your loan funds both cover the origination fee and pay off the debt you’re consolidating.

Not all lenders charge this fee, so you might want to apply with those that skip it. You also should compare APRs on debt consolidation loan offers. APRs will reflect the total loan costs — including the interest rate and origination fee.

Fun fact: Sometimes a lender might offer a good enough rate to make an origination fee worth paying.

3. Stop borrowing after debt consolidation

Getting a debt consolidation loan is only the first step to financial freedom. It can get the debt you already have under control, but it won’t end the cycle of borrowing — that’s up to you.

Consolidating debt must be followed by a responsible plan of action to avoid taking on additional debt.

Beware of the available lines of credit you might free up once you consolidate credit card debt and pay off your maxed-out balances. You should have a strategy in place to avoid charging new purchases to your credit cards. If not, you’ll quickly max them out and land yourself in twice as much debt.

Responsible spending is also a must. If you don’t think you can resist running up balances again, you might need to go as far as canceling your credit cards. It will have an adverse impact on your credit utilization ratio right now, but that’s ultimately better than ending up in even more debt.

Is debt consolidation right for you?

Lastly, after doing your homework, you might find that debt consolidation isn’t right for you. Maybe you already pay low interest rates, so there’s little potential for savings. Or you could have a rocky payment history that makes it difficult to qualify for debt consolidation with poor credit.

Instead of trying to consolidate debt, you can tackle it head on by taking some of the following steps:

Ultimately, if you’re struggling with your current payments or are at risk of defaulting and still have several years left on your loans, debt consolidation might be a good idea.

But if you’re managing to make the payments and have only a couple of years left until your payoff date, you might want to consider other options instead.

At the end of the day, is it worth making lower monthly payments in the long run? Or can you pay off your debt using alternative strategies? The choice is yours.

How LendingTree Can Help Your Debt Situation

If the burden of debt is too great for you to manage on your own, consider debt relief. It can help you get your finances under control if you’re struggling to keep up with multiple credit accounts and balances and other types of debt.

For a fee, a debt relief company can provide extra support to people overwhelmed by debt. This service often includes negotiating with creditors on your behalf to lower monthly payments, rates and what you owe. It can also restructure your debts into a single monthly payment plan. Many debt relief companies will also provide counseling to help you create a budget that works.

Find out more about how debt relief could help and get partnered with trusted providers through LendingTree’s debt relief marketplace.

Meredith Simmonds contributed to this article.

Interested in refinancing student loans?

Here are the top 6 lenders of 2020!
LenderVariable APREligible Degrees 
1.89% – 6.66%1Undergrad
& Graduate

Visit Splash

1.89% – 5.90%2Undergrad
& Graduate

Visit Laurel Road

2.25% – 6.09%3Undergrad
& Graduate

Visit SoFi

1.99% – 5.34%4Undergrad
& Graduate

Visit Earnest

1.97% – 8.54%5Undergrad
& Graduate

Visit Lendkey

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.


2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of December 1, 2020. Information and rates are subject to change without notice.
 


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 6.09% APR (with AutoPay). Variable rates from 2.25% APR to 6.09% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

4 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


5 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 11/13/2020 student loan refinancing rates range from 1.97% to 8.54% Variable APR with AutoPay and 2.95% to 8.77% Fixed APR with AutoPay.