When debt takes over your life, it can feel like you’ll never be able to get out from under it. Each month, you struggle to come up with the payments for each debt, praying that you won’t miss one. Debt consolidation, however, will combine all your debts into one so that you’re able to make a single payment each month. That makes it easier to keep up with and often lowers your payment to make it more manageable.


Debt is an unfortunately common financial issue that many Americans struggle with, and your own debts may include everything from outstanding balances on credit cards to personal loans, student loans and more.

For many people, the combination of multiple accounts with outstanding balances can be burdensome to deal with, and you may be challenged each month as you try to make the minimum monthly payments. Even if you can comfortably make the minimum payments on your debts each month, you may feel as though you are barely making a dent in your efforts to reduce your debt balances. With the combination of interest, new charges made to the accounts, late fees and more, it may take decades or longer for some to eliminate debt and to achieve the goal of living a life free of debt.

With this in mind, you may be looking for a more feasible plan to reduce and ultimately eliminate balances on your current debt accounts. Debt consolidation is an option that works well for many, and with a closer look at what this is, you may decide to pursue it as you create a debt reduction and elimination plan.

What Is Debt Consolidation?

Consolidating debt basically means that you are combining two or more accounts into a single account. There are multiple benefits associated with doing so, but the benefits will vary based on your specific financial situation as well as the types of debt that are consolidated and the type of account that the debts are consolidated into. For example, some types of debt, such as a home mortgage, have benefits like tax deductions and a fixed term. Others, such as a credit card account, have no tax benefits and a revolving term.

As you explore the options for your own consolidation efforts, it is important that you understand the differences in the types of debts that you have as well as their unique benefits and drawbacks.

Make a List of Your Current Accounts

Before you decide whether consolidation is a wise idea for you and before you determine the best way to consolidate your debt, it is critical that you list all of your accounts. This list should include the type of debt that it is, such as a fixed term loan, a revolving account or a home mortgage. Then, list the interest rate, minimum monthly payment and date when the account will be paid in full through your current payment efforts.

Finally, for any significant assets that you own, such as a house, a car, a boat or other large items of value, determine the equity available. The equity is the determined by subtracting the amount owed on a loan tied to the item from its current value. Then, you can explore the options for debt consolidation in greater detail to determine which is the right option for you.

Home Mortgage Refinancing

One of the most common methods of consolidating debt is to refinance a home mortgage. This option is only available to those who own their home and who have a significant amount of equity available in their property. Keep in mind that many lenders will cap the amount of money that you can borrow on a refinance mortgage at 75 to 80 percent loan-to-value.

There are both pros and cons associated with refinancing a home mortgage for debt consolidation. For example, with a mortgage refinance, you may have access to a considerable amount of equity, and this may mean that most or all of your debts can be consolidated into a single loan. The interest rate on mortgages is typically much lower than with other types of debt, such as credit cards and personal loans. However, the term length is longer. A longer term length will give you more affordable monthly payments, but it also means that it will take you longer to ultimately eliminate that debt from your life. The interest, however, may be tax deductible.

Another point to consider before moving forward with a mortgage refinance relates to the fees and the time requirement. Refinancing a mortgage generally will require you to pay numerous fees, such as an application fee, an appraisal fee, a loan processing fee, title charges and more. Furthermore, it may take a month or longer to finalize the refinance, so this is not ideal for those who are looking for an immediate solution to debt challenges.

Home Equity Loans

Home equity loans provide you with many of the same pros and cons as a mortgage refinance, but there are some differences. A mortgage refinance typically will take the first lien position, and this means that the new loan from refinancing your mortgage will replace your current first lien. The second lien may also need to be paid off through the refinance. With a home equity loan or line of credit, you may leave your existing first lien untouched, and the new loan or line of credit will take a secondary position. If you have a great rate on your current mortgage or if you have other desirable terms that you want to keep in place, a home equity loan makes sense.

A home equity loan or line of credit may also have a long fixed term, a low interest rate and tax deductions, but there are fees and time considerations to keep in mind. In addition, there are maximum loan amounts available based on the current amount of equity in your property. A smart idea is to discuss the option of a mortgage refinance versus a home equity loan or line of credit with a mortgage representative.

Secured Personal Installment Loans

There are instances when tapping into home equity through a refinance or home equity loan makes sense, but this option is not feasible for every situation. Some may not own a home, and others may not have an adequate amount of equity in their home, for example.

Another popular option available for debt consolidation is a personal installment loan. These loans may be secured or unsecured. With a secured personal installment loan, you will pledge collateral with the loan. This may be a boat, a car, artwork or other items of value. In many cases, you will need to apply for a very specific type of loan based on the type of asset that will be pledged. For example, if you will refinance your car to obtain the personal installment loan, you will need to apply for an automotive loan.

With a personal installment loan, the interest is generally not tax deductible as with a home mortgage loan. However, you may obtain a great rate on a secured loan. The term length may be a few years in many cases, and this can help you to make the payments more affordable. At the end of the fixed term, the debt is entirely paid off. You should be aware that your pledged asset will be at risk if you default on the loan. This means that your item may be seized by the financial institution if you do not make payments as agreed.

Unsecured Personal Installment Loans

An unsecured personal installment loan is well-suited for those who do not have assets to pledge or for those who do not want to place their assets at risk. These loans typically have a slightly higher interest rate than secured installment loans have, but you may find that the rate is far more advantageous than with a credit card account. Term lengths may be similar as well. Many financial institutions offer these loans, and you simply have to explore the options to find terms that are well-suited for your unique situation.

Credit Card Balance Transfer

Another option available to consider is a credit card balance transfer. This is perhaps one of the easiest options available for debt consolidation, but it is also one of the least effective. With a credit card balance transfer, you are transferring the debt from one credit card to another credit card. Both will likely have high interest rates compared to other types of debt that could be used for consolidation. Both will also have a revolving loan term, which is more difficult and time-consuming to pay off over time.

However, if one credit card has a much lower interest rate than another or if there are special balance transfer offers available, you can save money on interest charges by completing a balance transfer. There may also be small fees incurred when you transfer outstanding balances to a different credit card.

It can be stressful to live with high debt balances, and many people who carry a significant amount of debt may be searching for a way to reduce or pay off their balances. While you could continue to make the minimum monthly on your accounts, consolidating the debt can result in lower monthly payments, easier debt management and other benefits. Take time to review the options carefully as you create an effective debt reduction plan through the consolidation of two or more accounts.