What is Debt Consolidation?

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Whether it’s a McDonald’s value meal or a family cell phone plan, there are many situations where bundling multiple items together helps you get a better deal. Debt consolidation uses the same idea. You combine debt accounts into a single, better deal. This helps you negotiate a lower overall rate and simplifies your repayments because it’s easier to keep track of one loan than many. For example, if you have three credit cards with APRs of 14%, 20% and 23%, then your average rate is 19%. With debt consolidation and refinancing, you could group those accounts into a single loan with a rate between 6-18%.

Consolidating with a fixed rate personal loan gives you a simple repayment plan and timeline. Having a clear plan and a date when you’ll be debt free helps focus your efforts and spending habits.

Is Debt Consolidation Right For Me?

Debt consolidation loans are available to most people with multiple sources of high-interest debt, but the best time to consolidate debt is before you’re struggling to make monthly payments. If you’re proactive and establish a plan for your debt obligation before it feels like an emergency, you will be able to secure a much better deal — and you will avoid the dreaded feeling that you wasted time and money on a suboptimal payoff plan.

If you’ve already missed a few payments and you’re concerned about your ability to make future monthly payments, it will be harder to negotiate a debt consolidation loan at a low rate. In this case, you may want to consider debt settlement, also known as debt resolution.

The Benefits of Debt Consolidation

In addition to simplifying and lowering your repayments, debt consolidation can improve your credit score and budgeting habits.

Paying off your existing revolving balances and cutting your monthly debt obligations will improve your debt to income ratio. Additionally, having and managing diverse sources of debt will improve your credit score. Repaying a debt consolidation personal loan will help diversify your debt accounts and demonstrate financial responsibility.

Debt consolidation can also help with your budgeting habits. No one is born with good budgeting habits; they are a result of research, planning, and consistency. The checklist below will help you research, plan, and establish consistency. Being consistent can be tough when you have to keep track of many accounts with variable rates and terms, but consolidation with a fixed rate loan gives you a payoff plan. Services like Mint give you a financial dashboard to make it easy, and dare we say fun, to track your financial health. Most loans take three years to repay, giving these new, good habits plenty of time to become your new normal.

Now that you know what debt consolidation is, are you ready to take the next step?

If you’re serious about reducing your debt, here is our pre-consolidation checklist:

  • Make a list of all your current debts, the amount owed, the interest rate and the APR
  • Review the terms of each debt checking for prepayment penalties
  • Check your credit score and credit report
  • Research your options and check your rates. You can check your rate in 3 easy steps.
  • Compare rates to see which deal will save you the most time and money

See if you qualify for a loan on Upstart!

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* When you check your rate, we check your credit report. This initial (soft) inquiry will not affect your credit score. If you accept your rate and proceed with your application, we do another (hard) credit inquiry that will impact your credit score. If you take out a loan, repayment information will be reported to the credit bureaus.

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