5 must-know facts about debt consolidation

Wrangling multiple debt payments can be a thing of the past with the help of debt consolidation. Combining multiple debts into one monthly payment could help you sleep better and maybe even save money. 

1. You don’t need perfect credit

You read that right. Even if your credit profile isn’t at the high end, you might qualify for a debt consolidation loan. It’s possible to find lenders who accept applications from borrowers with fair credit. 

Whatever your situation, there is a solution out there. Start by looking at your credit score. Your own bank or credit card company might provide it. Otherwise, check a free credit score website. Then, find lenders that allow you to go through a soft credit inquiry that doesn’t affect your score. That way, you can research loans you may qualify for before you formally apply.  

Related: Debt consolidation pros and cons

2. It’s often possible to customize loan terms

When you apply for a home equity loan or a personal loan, you can choose the loan amount you want. You’ll be limited by the amount you qualify for and the lender’s loan limit, but you could borrow exactly—down to the dollar—the amount you want and no more. Let’s say you qualify for a $20,000 loan, but you only need $15,378. You could ask your lender for the lower amount.

Also, you can usually choose from several repayment terms (how long you have to pay back your loan). 

The choices don’t stop there. Once you’re approved, some lenders let you choose your payment due date—especially useful if you want more control when juggling your other bills. 

All of these options could help you manage your finances more effectively. 

3. You could save money while paying off the loan 

A debt consolidation loan should have a lower interest rate than the debts you’re consolidating. (You could consolidate to a higher rate, but it usually doesn’t make sense to do that.) For example, if you’re trying to combine multiple high-interest credit card balances, a personal loan could get you a lower interest rate.

Having a loan with a lower interest rate means your cost of borrowing goes down. That could translate to lower monthly payments. You could use any money you save each month as breathing room in your budget—perhaps for paying down other bills. Or you might choose to make a larger payment and pay off the loan faster. Shortening the payoff time could help you save money on interest charges overall. 

4. There are several debt consolidation loan options

You’re not stuck with one type of loan when consolidating your debt. You can usually choose from several kinds of loan and pick one that offers the best combination of loan amount, interest rate, and repayment terms. 

A personal loan can be a great tool for debt consolidation. This is a common loan option, and for good reason. If you’re approved, you could have the loan funds in a matter of days. (Funding times vary.) Plus, interest rates are usually fixed, so you’ll know your monthly payment amount with certainty. 

You could also use a home equity loan to pay off debts. You would need to be a homeowner with sufficient equity. Equity is the difference between what you owe on your mortgage and your home’s value. Home equity loans and HELOCs are secured loans, which means you offer your home as a guarantee that you’ll repay the loan. If you don’t, you could lose the home. For the lender, secured loans are less risky than unsecured loans, so they tend to cost less.

5. Debt consolidation could help your credit standing

Consolidating your debt simplifies your payments. It allows you to reduce multiple bills and payment due dates to one easy monthly payment. That means you might be less likely to miss a payment due date. On-time payments help you build and maintain good credit.

Plus, if you end up with lower payments, it may be easier on your budget.  

Debt consolidation could also lower your credit utilization ratio. Utilization means how much of your credit limits you’re using on your credit cards. For example, if you have a $900 balance on a card with a $1,000 limit, your utilization is 90%. Generally speaking, high utilization brings your credit score down. 

If you consolidate credit card debt, you may notice your scores improve. Using the loan to pay down your credit cards could lower your credit utilization. High revolving debt balances (credit cards) can negatively affect your credit score, but an installment loan doesn’t affect it the same way. The trick is to avoid charging up new balances on your credit cards after you pay them off with the loan. 

Paying on time and avoiding new credit card debt put you in the best position to build and maintain a strong credit profile. And improving your credit can open up more financial opportunities, helping you reach your goals faster.