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A Step-By-Step Guide to Consolidating Your Debt

debt consolidation
Fiona Staff3/4/2022

Juggling debt can be a time-consuming and often overwhelming experience. In order to manage multiple account balances, you have to worry about different interest rates, minimum payment amounts, and due dates for each debt obligation.

Consolidating debt is a great way to not only simplify your repayments, but potentially save money along the way. Here’s a step-by-step guide to consolidating balances, and the possible benefits. 

Gather What (and Where) You Owe

The first step to consolidating your debt is figuring out what debt you can consolidate in the first place. 

Spend an afternoon gathering all of your current account statements and balances. This could include your:

  • Credit card accounts

  • Student loans

  • Auto loans

  • Other revolving credit lines or installment loans

  • Medical bills

While there are specific products available to refinance your auto loan or student loan debt, you can also combine these balances with other accounts and consolidate multiple debts all at once.

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Determine Your Monthly Payment Total

Once you have your statements in-hand, add up what you are required to pay each month.

Installment loans (e.g., student loans) have a set monthly payment for the duration of the loan term. The balance due on revolving accounts (e.g., credit cards), however, will change from one month to the next, depending on your spending. 

When every debt is taken into consideration, add up what you owe on average per month, to determine your current minimum monthly debt burden.

Identify Any Existing Benefits

Certain accounts and debt products include benefits that might be lost if you consolidate. For example, federal student loans offer forbearance options and forgiveness programs to borrowers who qualify. If you refinance these debts into a new private loan, you will lose those benefits. 

If you don’t qualify for student loan relief programs, which is more typical with private student loans, refinancing may be the better choice.

Weigh Your Options

Now that you know what you owe and to whom — and have a good idea of what your debt burden is each month — you can start comparing your debt consolidation options. 

There are a few different choices for consolidating debt. Some common options are:

  • Balance transfer credit card

  • Home equity loan

  • Personal loan

Balance Transfer Card

Some credit card issuers have introductory balance transfer offers for new cardholders. This allows people to transfer existing balances onto a new card, paying off the balance at a low (typically 0%) APR for a set time period.

Of course, balance transfer cards only work when consolidating credit card debt. There are usually fees involved (often 3% to 5%) as well. Additionally, if the total transferred balance is not paid off by the time the introductory period ends, any remaining debt will incur the card’s standard interest charges.

Home Equity Line of Credit

If you have built up equity in your home, you may be able to use a home equity line of credit (HELOC) or home equity loan to pay off consolidated debt. Interest rates are usually lower than those offered by credit card issuers, and allows you to access the equity you’ve built up for your home instead of a revolving credit line.

This process can sometimes be as lengthy and complex as a new home mortgage, however, involving a new home appraisal, complex underwriting, and the like. It’s also important to note that home equity loans are secured by your home; if you were to default on this debt, your home could be at risk.

Personal Loan

Perhaps the popular option for consolidating debt (typically that of credit cards) is through a personal loan. Personal loans can be used to consolidate any number of existing debts, whether you are looking to combine multiple credit card balances, pay off a high-interest auto loan, consolidate student loans, medical bills, and more

A personal loan can be used to reduce your net interest rate, simplify multiple debts into one monthly payment, or even remove existing co-borrowers.

Start Shopping Around

Once you decide how you want to consolidate your debt, it’s time to seek out the best options available, based on your specific needs and creditworthiness. 

If a personal loan is the right consolidation option for you, consider using a platform like Fiona to compare multiple offers from top online lenders. With Fiona, you can fill out a quick and easy online form and “get matched” with offers including competitive rates and flexible terms. Better yet, using Fiona is free and has zero effect on your credit score. 

Bottom Line

Consolidating debt can potentially be a great option if you’re looking to get out of debt faster, pay less in interest, simplify your monthly payments, or all of the above. While there are a few different options for consolidating debt, taking out a personal loan may be the most convenient and cost-effective choice for many borrowers.

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