The Best Types of Debt for Consolidation
Although carrying debt is a very common experience in America, there’s no universal way to get out of it. What works for one person may not for their neighbor. The most fitting way to deal with debt depends on factors like the amounts owed, types of debt, the credit score of the borrower and more.
Debt consolidation is one potential way to streamline debts and possible pay them off in less time at less expense. Want to know if debt consolidation is a possible path forward for you? Start by considering the types of debt you have — then see if they match up with the best types of debt for consolidation.
Four Types of Debt It May Make Sense to Consolidate
The main thing to keep in mind when it comes to a specialized debt consolidation service is it primarily works on unsecured debts — those not backed by collateral — rather than secured ones.
Examples of unsecured debts eligible for consolidation include:
- Credit Card Balances: Credit cards are known for having high average interest rates, so it often makes sense to consolidate these if you can qualify for a loan at a lower interest rate or transfer existing balances to a new card with better terms.
- Medical Bills: The first step is usually trying to negotiate charges down with the provider or applying for hardship assistance, but getting a person loan is a possible solution to dealing with steep medical debt too. Another option is consolidating medical bills onto a zero-percent interest credit card, according to NerdWallet — but only if you can pay the entire balance before the introductory period expires.
- High-Interest Loans: Say you took out a high-interest loan in the past, but have since improved your credit standing — or have seen interest rates drop in general since last time you borrowed. You might be able to get a new loan with a lower annual percentage rate (APR) to pay off the old one, saving you money on interest charges.
- Student Loans: Many borrowers with student loans end up juggling multiple loans, each with its own terms and interest rate. You may be able to streamline here, making the monthly repayment process easier and saving money if you qualify for a competitive interest rate.
As we mentioned earlier, consolidation generally applies to unsecured loans rather than secured ones, like auto loans and mortgages. You’ll notice these types of loans generally carry lower interest rates— because tying the loan to a physical asset reduces lenders’ risk. Therefore, replacing them with a personal loan usually doesn’t make financial sense.
When Does Debt Consolidation Make Sense?
According to Value Penguin, here are a few situations in which debt consolidation may make sense:
- Trying to stay on top of unsecured debts is making it difficult to afford essential living expenses.
- Your credit score is good or excellent so you’re able to qualify for low interest rates on loans or a balance transfer credit card. Borrowers with fair or bad credit may be better suited to a debt management plan or other solution.
- You’re able to create a budget, reduce your expenses and stick to this spending plan for as long as it takes to consolidate. Consolidating without changing your spending behaviors can unfortunately beget even more debt.
The rule of thumb to keep in mind when it comes to debt consolidation is to consider it for streamlining unsecured debts with higher interest rates than you can get on a consolidation loan or balance transfer credit card. The best-case scenario upon consolidating is streamlining your debts for the sake of convenience and reducing the amount you end up paying in interest charges — possibly by hundreds or thousands of dollars.
