Debt consolidation

What It Means

Debt consolidation means taking out one new loan or credit lineCredit limitThe most your card company lets you owe on a credit card or line of credit at one time. See more and using it to pay off several existing debtsLiabilitiesDebts and other money you owe, such as a mortgage, a car loan or a credit card balance. Your assets minus your liabilities is your net worth. See more, so you're left with a single balance and one payment. The Consumer Financial Protection Bureau (CFPB) describes three common routes: a balance transfer credit cardBalance transferMoving what you owe on one credit card to another card, usually to use a low promotional interest rate for a set time. See more, a debt consolidation loan and a home equity loanHome equity loanA loan secured by your home's equity that pays out one amount at the start and is usually repaid at a fixed rate; often called a second mortgage. See more. Whether it saves money depends on the new rate, the fees and how long the new debt runs.

How People Say It

• "We rolled all three cards into one loan."
• "One payment a month is so much easier to keep track of."
• "Is the consolidation rate actually lower than what we pay now?"

The Breakdown

Worked example. Credit card debts totaling $1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more,000 at an average APR of 22%, paid at $400 a month, compared with a consolidation loan at 12% that adds a 5% fee to the amount borrowed:

These are Buhata's example numbers, rounded, using the APR divided by 12 each month.

What the result means. The 36-month loan costs about $944 less than staying on the current plan. Stretching the same loan to 60 months drops the payment to about $234, yet the total climbs to roughly $515 more than the current plan. The CFPB warns about exactly this trade: a smaller monthly payment can come from paying over a longer time, which adds to what you pay overall.

Good to Know

The CFPB flags several ways consolidation can go wrong. Low advertised rates may be teaser rates that rise after a set period, and if debt problems have hurt your credit scoreCredit scoreA three-digit number calculated from your credit report that lenders use to judge how likely you are to repay; common models run from 300 to 850. See more, you may not qualify for the low rates at all. On a balance transfer card, falling more than 60 days behind lets the issuer raise the rate on every balance, the transferred one included. A home equity loan uses your house as collateral, so the lender can take it if you don't repay, and the equityHome equityThe part of your home you own outright: its current value minus everything you still owe on loans secured by it. See more you borrow is no longer there for an emergency. The CFPB is also direct about overspending: when debt grew because more went out than came in, a new loan leaves that gap open, and consolidation is unlikely to help until spending falls or income rises.

Related Terms and Categories

• Balance transfer

  Moving what you owe on one credit card to another card, usually to use a low promotional interest rate for a set time.

• Personal loan

  An installment loan, usually unsecured, that a bank, credit union or online lender pays out as a lump sum you can use for almost any personal purpose.

• Home equity loan

  A loan secured by your home's equity that pays out one amount at the start and is usually repaid at a fixed rate; often called a second mortgage.

• Loan origination fee

  A charge a lender makes for setting up a loan, usually a percentage of the amount borrowed, either paid up front or taken out of the money you receive.

• Debt management plan

  A repayment plan set up by a credit counseling organization: you make one monthly payment to it, and it pays your creditors, often at lower rates.

Debt and credit