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Planning your financial future

Do I need to consolidate my debt?

In this article, you'll learn some of what you need to know about debt consolidation so you can better understand your options.

Millions of Americans are struggling under the weight of debt. Credit card bills, student loans and even healthcare costs all contribute to debt stress.

What is debt consolidation?

If you've been trying to figure out your best options to help manage your debt, you might have come across the term debt consolidation.

Debt consolidation is combining multiple outstanding debts into one single payment.

Most of the time, people consolidate unsecured debt. Unlike secured debt, which gets secured by an asset like a home or car, this is debt where there is no physical asset to back it up. The lender - a credit card, for example - can send your debt to collection or garnish wages to recoup lost payments.

Some of the most common types of debt that people consolidate include: credit card debt, medical bills, personal loans and payday loans.

How does debt consolidation work?

There are several ways to consolidate debt. Consider each option carefully and speak with a financial professional about your situation before making a decision.

1. Credit card balance transfer

One approach is a credit card balance transfer. In these instances, consumers can transfer existing credit card debt from one card to a no- or- low-interest rate card and pay off the debt there.

Keep in mind, when it comes to dealing with credit card debt, there are some options that are riskier than others.

2. Fixed-rate loan

A fixed-rate loan is a personal loan where the interest rate stays the same during the loan's duration.

In this scenario, you take out a loan that covers the balance (or a significant portion) of your debts. Outstanding debts are paid off, and you're left with one loan to make payments toward monthly. With fixed-rate loans, it is important to be aware of the terms and conditions of the loan since in some circumstances the lender can change the interest rate.

3. Home equity loan

A home equity loan is a type of second mortgage based on the value of your home, as determined by the lender, minus what's owed on the mortgage.

With a home equity loan, you will get a lump sum upfront, which you can use to pay off debts. Then you repay the home equity loan in fixed payments over a specified term.

4. 401(k) loan

Some 401(k) plan providers allow those younger than 59 1/2 to borrow from their vested balance. Find out why borrowing against your 401(k) may not be a good idea.

Do I need to consolidate my debt?

Before you decide to consolidate any debt, it's critical to understand your financial situation.

You might find that working with a financial professional to devise a plan of action for creating a budget can solve a lot of problems. Also, your financial professional can help you analyze your debts and determine the priorities for payments.

It's also critical to think about creating a long-term plan that helps you pay off your debt while still saving toward long-term goals such as retirement.

Once you run through your situation and scenarios, you'll have a much better idea if debt consolidation is something that's right for you.

The pros and cons of debt consolidation

As you learn more about debt consolidation and consider if it's right for you, understand the pros and cons.


  • If you aggressively pay down your debt, it's possible to save money over the long term.

  • It's possible to qualify for a lower interest rate on a new loan or balance transfer than you're currently paying on your outstanding debts. This can potentially save you money.

  • Debt consolidation could help prevent possible bankruptcy, which can impact your credit for years.


  • If you can't pay off your transferred credit card balance within the no- or low-balance period, you'll have to pay interest on the entire amount transferred.

  • Borrowing against your home is inherently risky. If you're unable to make payments, you could lose your home.

  • Taking a loan from your 401(k) can leave your retirement income at risk, and if you don't repay the loan, you can suffer tax consequences.

Remember, before making any decisions about debt consolidation, consider discussing your situation with a financial professional.

Explore our learning center to learn more about money management.


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