4 Types of Debt You Can Consolidate | Bankrate (2024)

Key takeaways

  • Debt consolidation can make repayment easier by consolidating multiple accounts into a single one.
  • Consolidating debt can save you money on interest and help you get out of debt faster, depending on your situation.
  • Unsecured debt, such as credit cards, student loans, medical bills and high-interest loans can all be consolidated.

Loan debt consolidation is when you take out a new loan to pay off multiple debts. Four types of debt are commonly consolidated: credit card debt, student loan debt, medical debt and high-interest personal loan debt.

You may reduce the overall cost of repayment by securing better terms and interest. You’ll also have a single payment to keep track of instead of several.

You can consolidate credit card debt

Paying down your monthly credit card balance on time and in full is the best way to improve your score and avoid paying interest.

However, those who have multiple high-interest credit cards and borrowers who have a hard time meeting all of the monthly payments may benefit from debt consolidation.

Consolidating your credit card debt simplifies your repayment process. It can also save you thousands of dollars in interest accrual, as personal loans have an average interest rate of 12.21 percent.

Due to high inflation and historic interest rate hikes, the average credit card interest rate has climbed to nearly 21 percent. Now more than ever, borrowers in good credit health should consolidate their debts if they’re offered a lower interest rate through a personal loan.

Financial benefits

When you consolidate, it makes sense to start with the most expensive debts first. That could be your credit card accounts due to the interest rates alone. When offered a debt consolidation loan with a lower rate than your original debts, you could save a significant chunk of change due to the decreased rates.

Cost savings

Using a low-interest personal loan to pay off pricey credit card debt has the potential to save you a lot of money. For example, if your annual percentage rate (APR) is 16.00 percent on your credit card and you consolidate $10,000 in debt with a new, 24-month personal loan with a 7.50 percent percent rate, you could save:

  • Nearly $1,100 in interest fees
  • Nearly $50 per month

Faster payoff

If you qualify for a low-interest personal loan, you could pay off your debt in a significantly shorter amount of time.

Credit benefits

Thirty percent of your FICO Score is set by how much of your available credit you’re using, also known as your credit utilization ratio. If you’re using most of your available credit, it can be harder to get approved for other forms of debt and can lower your score.

With a consolidation loan, the amount of debt owed would still be on your credit report. However because personal loans are installment loans, they don’t impact your score as severely as credit cards. Consolidating your debt and making the monthly payments is a sure-fire way to quickly increase your score by lowering your utilization levels.

You can also use a balance transfer credit card to pay off your outstanding credit card debt. If you have good credit, you may be able to qualify for a balance transfer offer with a low or 0 percent interest rate for six, 12 or even up to 24 months.

However, because the new balance transfer card is still a revolving account, you probably won’t see as much of a credit score benefit if you opt for this as you would with a personal loan. Plus, if you don’t pay down the balance by the end of the offer period, you could find yourself stuck with more high-interest debt down the road.

You can consolidate student loans

Student loan consolidation is a popular loan management option among borrowers; it simplifies repayment by condensing multiple loans and can save money on interest.

However, consolidating your student debt isn’t the solution for every borrower. In some situations, it causes more harm than good.

You can consolidate both federal and private loans, but when it comes to federal loans, you should try consolidating them through the Department of Education. If you consolidate federal student loans with a private lender, you’ll lose all benefits and protections that are available for federal student loan borrowers. These include income-driven repayment plans and access to forgiveness programs.

Student loan consolidation may be a good fit if you:

  • You have high-interest private student loan debt
  • Your new loan (whether federal or private) carries a much lower APR than your current student loan debt.

See related: How to consolidate student loans

Financial benefits

The amount of interest you pay on student loans can add up over time, but consolidating can give you the financial relief you need.

Lower interest rate

You might be able to secure a lower interest rate on a student loan consolidation. The more money you owe in student loans, the more money you stand to save by consolidating to a new loan with a lower interest rate.

Credit benefits

One of the factors that scoring models pay attention to is the number of accounts with balances on your credit report. Known as your credit mix, it makes up 10 percent of your FICO score; while it’s not the largest scoring factor, it’s still important to keep an eye on how many accounts you have open.

By reducing your number of outstanding accounts, you’ll likely see your credit score improve. While it probably won’t jump significantly from this factor alone, it’s likely that you’ll see a credit score increase of at least a few points.

Consolidating your student debt can also save your credit report in the long-run if you miss your monthly payment and it shifts to delinquent status. Even though you’re only making one payment to your lender, you’re paying down all of your loans on the repayment plan. That being said, any delinquent payments will show up on your credit report for each active student loan and will remain on your report for seven years.

When you consolidate, you only have one loan; therefore, only one account would have a delinquent payment report. While one late payment still isn’t good for your credit score, it’s less detrimental to your credit health than if you were to have past-due payments on six accounts.

You can consolidate medical debt

According to data by Peterson-KFF Health System Tracker, nearly one in 10 U.S. adults have some form of medical debt. Although medical debt doesn’t accrue interest, it could damage your credit if left unattended.

Financial benefits

If you have high medical bills that have been sitting around for a while and are unable to work out a payment plan with your medical provider, consolidating may be a good option to pay off that debt.

Make repayment more manageable

There are a few ways you can go about consolidating medical debt, but a 0 percent interest credit card or personal loans are two of the most common ways to do it.

If you’re struggling with medical bills that are on the higher side, consolidating can make repayment easier by rolling multiple accounts into a single monthly payment.

On the downside, consolidating medical debt means you’ll most likely pay interest on it — at least if you pursue the personal loan route. Still, if these bills have been sitting there for a while, it may be worth a try.

Credit benefits

Medical debt is not reported to the credit bureaus. However, if your medical provider sends the account to collections, it could end up in your credit report. It’s worth noting that this scenario only applies to balances of $500 or more, and that have been unpaid for a year or more, after your doctor’s appointment.

By consolidating high medical bills, you can avoid getting negative marks on your report that could result from the account being sent to collections.

You can consolidate personal loans

Whether you’re trying to simplify your finances or get out of debt quicker, it might make sense to consolidate high-interest personal loans. This is especially true if your credit and income have improved since you first took out those loans.

Financial benefits

The interest rate on personal loans is most competitive if you have good or excellent credit. But if your credit score is lower, you’ll likely receive a hefty rate that increases your monthly payment.

Save on interest

If you’ve taken out personal loans in the past, you might be able to save money on interest by securing a new loan with a lower APR. It only makes sense to consolidate if you’re offered a lower interest rate. So, prequalify with as many lenders as possible before officially applying.

Many lenders offer prequalification. It allows borrowers to see their eligibility odds and predicted rates with no hard credit inquiry. Unless you’re certain that you’ll be offered a lower rate, don’t apply to multiple lenders that don’t offer prequalification. You risk multiple hard-credit inquiries and failed applications.

Credit benefits

Because personal loans are installment accounts — not revolving — consolidating these loans into a new personal loan won’t lower your credit utilization rate. Your scores might benefit slightly if you reduce your number of accounts, but the credit inquiry and the presence of a new account on your report might offset that potential score increase.

However, if you can save money by consolidating your personal loans with a more affordable installment option, it probably makes sense to go for it. Even if your credit scores do take a slight hit from the new inquiry and loan, your scores can bounce back in time as the account ages and you manage it properly.

Bottom line

You can consolidate credit card, student loan and high-interest personal loan debt to lower your interest rates and make your monthly payments more affordable. Additionally, medical debts that have been sitting for a while can also be consolidated to avoid them being sent to collections and damaging your credit.

Debt consolidation streamlines the repayment process, making it easier to manage your outstanding debt obligations, and can help improve your credit and overall financial health.

Before you apply for a loan, it’s important to educate yourself on how the process works and what debts can be consolidated. You should also analyze your budget and spending habits to ensure consolidating won’t tempt you to overspend and land you in a bigger mountain of debt.

4 Types of Debt You Can Consolidate | Bankrate (2024)


4 Types of Debt You Can Consolidate | Bankrate? ›

Loan debt consolidation is when you take out a new loan to pay off multiple debts. Four types of debt are commonly consolidated: credit card debt, student loan debt, medical debt and high-interest personal loan debt. You may reduce the overall cost of repayment by securing better terms and interest.

What are the different types of consolidation loans? ›

Debt consolidation options
  • Balance transfer credit card. The best balance transfer cards often come with zero interest or a very low interest rate for an introductory period of up to 18 months. ...
  • Home equity loan or home equity line of credit (HELOC) ...
  • Debt consolidation loan. ...
  • Peer-to-peer loan. ...
  • Debt management plan.
Jan 19, 2024

What is debt consolidation quizlet? ›

DEFINITION of 'Debt Consolidation' The combining of several unsecured debts into a single, new loan that is more favorable.

Can you consolidate all your debt? ›

Debt consolidation loan

Banks, credit unions, and installment loan lenders may offer debt consolidation loans. These loans convert many of your debts into one loan payment, simplifying how many payments you have to make. These offers also might be for lower interest rates than what you're currently paying.

What is the debt consolidation method? ›

Debt consolidation is a popular way to manage and organize high-interest debt. This strategy consists of rolling multiple debts into a single account, often with a lower interest rate, to streamline repayment. Understanding how debt consolidation works is crucial to selecting the best approach for your situation.

What are 4 things debt consolidation can do? ›

Loan debt consolidation is when you take out a new loan to pay off multiple debts. Four types of debt are commonly consolidated: credit card debt, student loan debt, medical debt and high-interest personal loan debt. You may reduce the overall cost of repayment by securing better terms and interest.

How many types of consolidation are there? ›

Method 1 (full consolidation): Voting interest entity (VOE) Method 2 (full consolidation): Variable interest entity (VIE) Method 3: Equity method of consolidation.

What is the risk of debt consolidation? ›

You can afford to repay the loan: A debt consolidation loan will only benefit you if you can afford to repay it. You'll risk getting into a deeper debt cycle if you're not 100 percent sure you'll be able to afford the monthly payment down the road.

Which of the following defines loan consolidation? ›

A loan consolidation combines a number of loans into a single new loan with a lower interest rate and a new payment plan. Loan consolidation has many benefits. A debtor doesn't have to pay different creditors, but can make one single payment to one creditor each paying period (usually a month).

What is debt consolidation vs loan? ›

Key Takeaways. Personal loans are usually unsecured installment loans. Debt consolidation loans are a type of loan, which can be either personal or business, that you can use to combine multiple outstanding balances into one.

Can you choose which debts to consolidate? ›

In most cases, any type of debt that doesn't have collateral can usually be consolidated.

Why can't I consolidate my debt? ›

Insufficient credit history or poor payment history can also lead to a denial of a debt consolidation loan. Remember, your payment history is the most important factor in your credit score, comprising 35% of your FICO® Score. Even one missed payment can damage your score.

What is the fastest way to consolidate debt? ›

Working with a loan officer, credit counselor or on your own, gather all the debts you want to combine into one payment. From there, a plan or loan is set in place for you to make your monthly payment to one location, making it easier to remember your due date, along with hopefully having a lower APR to pay.

What are the three methods of consolidation? ›

The income statement must adhere to the chosen consolidation method, whether it's the equity method, proportionate consolidation, or full consolidation. When using the equity method of accounting, the parent company's income statement reflects its share of the subsidiary's net income.

Is consolidation good or bad? ›

Debt consolidation is ideal when you are able to receive an interest rate that's lower than the rates you're paying for your current debts. Many lenders allow you to check what rate you'd be approved for without hurting your credit score so you can make sure you're okay with the terms before signing on the dotted line.

Why would you consolidate debt? ›

Debt consolidation refers to taking out a new loan or credit card to pay off other existing loans or credit cards. By combining multiple debts into a single, larger loan, you may also be able to obtain more favorable payoff terms, such as a lower interest rate, lower monthly payments, or both.

What is the best type of loan to consolidate debt? ›

Best debt consolidation loans
  • SoFi: Best for fast funding.
  • Upgrade: Best for poor or thin credit.
  • Achieve: Best for quick approval decisions.
  • LendingClub: Best for co-borrowers.
  • Discover: Best for excellent credit.
  • Happy Money: Best for credit card consolidation.
  • LightStream: Best for large loans.

What is the best option for consolidation? ›

A home equity loan/HELOC may not require good credit or a high credit score. If you have paid off a large portion of your primary mortgage or own a home that has substantially appreciated in value, you could qualify for an equity loan or HELOC that is more than enough to pay off your credit card balances.

What are the 3 methods of business consolidation? ›

The 3 Types of Consolidation Accounting
  • Type 1: Full Consolidation.
  • Type 2: Proportionate Consolidation.
  • Type 3: Equity Consolidation.
Mar 11, 2024


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