Debt consolidation

Combining several debts into a single new loan or account, ideally with a lower interest rate or simpler payment.

What it means

Consolidation replaces multiple balances with one, using tools such as a personal loan, a balance transfer credit card, a home equity loan or HELOC, or, for federal student loans, a federal Direct Consolidation Loan. It can lower interest costs, reduce the number of payments to track and set a firm payoff date.

It works only if the new terms are actually better after fees and the borrower avoids running up the old accounts again. Stretching the term can lower the payment while raising total interest, and moving unsecured debt onto a home puts the home at risk.

Example

Suppose someone has $15,000 spread across cards charging around 22% and takes a 4-year personal loan at an illustrative 11%. The fixed payment is about $387.68 a month, with about $3,609 in total interest and a set payoff date.

How it’s used

Simplifying several credit card payments
Lowering interest on high-rate debt
Combining federal student loans into one

Strengths and weaknesses

Strengths

One payment to manage
Can cut interest costs
Fixed payoff schedule with installment loans

Weaknesses

Fees such as origination or balance transfer charges
Longer terms can raise total interest
Freed-up credit lines can tempt new borrowing

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.