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Debt consolidation is a payment strategy where you combine your existing small debts in one debt which is paid off through a loan or a management plan. It is also known as “credit consolidation” or “bill consolidation”.


Debt consolidation is a smart move to help ease your financial woes. It is typically given against debts which are not tied to any physical assets, or as they are called: unsecured loans. The examples include your credit card bills, student loans, medical bills etc. These are usually high-interest debts which you combine to pay in one monthly bill on a rate of interest lower than what you were already paying.

How it Works:

Debt consolidation can be done in any of the following ways;

Debt Consolidation without a Loan: You have to involve credit counselling agencies who offer nonprofit debt consolidation through a debt management program. These agencies approach the card companies and work out an interest rate and monthly payment plan which is acceptable to you. You will then send a monthly payment to the credit counseling agency who will distribute it among your creditors in an agreed manner. The agency may negotiate with the card companies to waive penalties like late fees etc. This is a long-term solution though and will take around 3-5 years to complete. If you miss a payment in this time period you risk losing all the concessions that were given to you.

Debt Consolidation with a Loan: A traditional and popular way of debt consolidation is through a loan. Get a loan that is equal to all the outstanding debts that you want to settle. This loan from a bank, credit union or online lender. You pay off all your debts through this loan and pay back the new loan on a monthly basis, on the interest rate negotiated with the lender. The lender usually looks at your credit rating before granting the loan. If your credit rating is shaky loan would be hard to obtain. You have to take into account the rate of interest of the new loan. It should be lower than the average rate of interest that you were paying on your existing debts. Otherwise, it’s of no use.

There are other methods of debt consolidation too. Like, personal loans and home equity loans etc. But in any case, you have to see that the interest rate and the repayment period should be favorable to you.

Benefits of Debt Consolidation:

The obvious benefit of debt consolidation is that you get rid of your debts instantly. You get more favorable terms for your new loan which reduces your financial worries. To make one single payment to one creditor instead of multiple payments to multiple creditors in one month. Get a fiscal breathing space that you can use to make some wise investment decisions and earn some extra cash.

When to go for Debt Consolidation:

You can opt for debt consolidation when obviously you are tired of your credit cards and other loans piling up. But before giving a nod to debt consolidation you have to make some basic checks which we summarize for you in the following steps:

  • See your monthly income. You should have at least 60% of it left with you after you pay your payments and bills.
  • A good credit rating to qualify for a loan from lenders.
  • Do not falter on the payments due to you.
  • You have a plan to not end up in debt again.

When not to go for Debt Consolidation:

As tempting as it may seem debt consolidation is not the answer to all your financial bottlenecks. You have to make a prudent decision based on sound economic fundamentals. Here’s when you should not consider debt consolidation;

  • When you know your monthly income is steady and you can easily pay off the credit bills etc. with it in the next 3-6 months. No need to get a new loan to pay the old ones.
  • When you can’t stop being reckless with money. It’s your spending habits that got you here in the first place. Debt consolidation will do you no good when you can’t control your spending.
  • If you are deep in debt, and you know you can’t pay it off even with reduced payments do not avail this facility. Look for other options which we will discuss further down below.
  • Make sure that the debt consolidation plan will eventually help you save money.
  • Debt consolidation plan asks for regular and constant payments. If you miss even one you will end up in trouble. So, work out your cash flow thoroughly before you go for it.

Alternatives to Debt Consolidation:

If your debt situation is getting out of hand and you realize you cannot get out of it even after opting for debt consolidation then there are other solutions at hand. Chief among those are;

  • Bankruptcy
  • Debt Settlement.

Let’s look at them both briefly.

Bankruptcy: You go to a competent legal authority or a court of law and file for bankruptcy. After going through the facts of your case, you will be declared bankrupt. You will lose access to all your credit cards and most of your possessions will be sold off to pay your debts. But you will get to keep your house, car and work-related possessions. You can start afresh and put all these behind you.

Debt Settlement: This is when you sit with your creditor and negotiate the amount you owe to him. Usually you can get waiver of around 50% of your debt. The balance however will have to be paid, and it will grow if you factor in interest. Not all companies accept debt settlements though, and it also damages your credit score for seven years.

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