Debt consolidation loans: one payment, if the math works
A consolidation loan pays off several debts so you have one monthly payment. It only saves money if the total cost beats what you pay now.
How it works
You apply for a new loan, and the money pays off your existing balances. You then repay the loan at a fixed rate over a set term.
An example of the math
These are illustrative numbers, not an offer. A $20,000 balance repaid over 48 months costs about $652 a month at 24% APR and about $557 a month at 15% APR. Over the full term, that's about $4,580 less at the lower rate.
What to compare
- APR, which includes certain fees and is more useful than the interest rate alone
- Origination fees taken from the loan amount
- Total of all payments, not just the monthly payment
- Whether a longer term raises your overall cost
Watch for this: the CFPB warns that many companies advertising "consolidation" are actually debt settlement firms. If someone tells you to stop paying your creditors, you're not looking at a loan.
Other ways to consolidate
The CFPB also lists balance transfer cards, home equity loans and debt repayment plans. A home equity loan puts your home on the line, so be careful about turning unsecured debt into secured debt.
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Questions
Does a consolidation loan reduce my debt?
No. It replaces debts with a new loan. You still owe the full amount, but you may pay less interest.
Should I talk to anyone first?
The CFPB recommends considering a nonprofit credit counselor before you consolidate.
What credit do I need?
It varies by lender. Better credit generally gets lower rates, and some borrowers won't qualify for a rate that helps.
How is this different from debt settlement?
A loan repays your debts in full. Settlement tries to pay creditors less than you owe, usually after you stop paying them.