What Debt Can Be Consolidated and How

Consolidating debt lets you reduce the cost of your overall repayment by securing better terms and interest. Shutterstock

Be it a mortgage, an auto loan, or credit cards, most people are carrying some type of debt. And many have multiple loans, both secured and unsecured, they’re paying on each month. Those who are overwhelmed with various types of debt may be thinking of consolidating it.

All debt isn’t equal when it comes to consolidating. There are certain types that either aren’t eligible or need specific programs. But what debt can you consolidate?

Secured Debt Versus Unsecured Debt Consolidated Loans

A consolidated loan lets you roll over several debt balances into a new loan. The result is that you make one payment at a lower interest rate.

There are two types of consolidated loans available. The first is a secured debt consolidated loan. This requires collateral for approval. The collateral could be your home.

By putting up collateral, you reduce the lender’s risk. You may find being approved easier. There may also be the potential for a larger loan or lower rates. But although it reduces the lender’s risk, the risk to you has increased since failure to pay could lead you to lose the item you put up for collateral.

The second type, an unsecured debt consolidation loan, doesn’t require collateral. Approval for an unsecured loan is based on creditworthiness and financial profile. Your assets aren’t at risk. However, it poses a greater risk for the lender, and it can sometimes be difficult to find someone who will approve you.

Despite which type of consolidation loan you apply for, there is certain debt that you can consolidate.

Debt You Can Consolidate

Consolidating debt lets you reduce the cost of your overall repayment by securing better terms and interest. You'll also only have one payment. This can be extremely attractive to those with multiple high-interest loans. But there are only specific types of debt that can be consolidated.

Bank Credit Card Debt

With the average credit card interest rate averaging 24.61 percent as of November, this is the most common form of debt consolidation. For those with multiple credit cards, you could save hundreds or thousands of dollars in interest payments if you consolidate the card into one low-interest loan.

Retail Store Cards Debt

Retail store cards generally carry a high interest rate. The average retail credit card has a 30 percent annual percentage rate (APR). Some people carry multiple retail cards and may not realize what expensive debt they’re accumulating.

These individuals can consolidate these high-interest cards into lower-interest loans and benefit financially with one payment.

Unsecured Personal Loans

If you have a personal loan with a high interest rate, you might be able to save money by consolidating it with other debt. But it only makes sense to consolidate if you’re offered a lower APR. So you should prequalify with several lenders before applying.

Unless you’re confident that you‘ll receive a lower rate, don’t apply to multiple lenders that don’t offer prequalification. Otherwise, you’ll risk multiple hard credit inquiries and failed applications.

Student Loan Debt

The federal government offers consolidation options for people with multiple student loans. These are run through the Department of Education’s Direct Consolidation Loan. The interest rate is the weighted average of the previous loans.

Consolidation can result in lower monthly payments by stretching out the payments over 30 years. But in the long run, you'll be paying more interest. Private loans don’t qualify for this program.

You also can consolidate your federal student loans with a private lender. But if you’re considering consolidating your federal loans under a private lender, be aware that you won’t be eligible for income-driven repayment plans from the government.

It is also important to note that parents who took out loans for their dependent student’s education can’t consolidate these together with student loans that the student received.

Private student loans cannot be consolidated under the federal program, but they can be consolidated under a private loan.

Advantages of Consolidating Debt

There are several reasons to consolidate debt. For one, if you obtain a loan with a low interest rate, you could potentially save money.

You'll also have fewer payments to worry about. There will only be one monthly payment, so there is less potential to forget one and incur late fees or damage your credit.

But there are some cons to consolidating a loan

Disadvantages of Consolidating Debt

When obtaining a loan, most lenders will require you to close the accounts for which you will be using the money. This could temporarily have a negative impact on your credit score.

If you refinance your home to consolidate your credit card bills, you will be converting unsecured debt to secured debt. This could put your home at risk if you fail to make the new higher payment. You’ll also have fees associated with opening the new loan.

But you also must be aware that if bad behavior such as undisciplined spending habits caused you to be in this situation, you'll need to change. Ultimately, with a consolidated loan, you still must repay the debt, which may entail changing old habits.

Consolidating Debt May Be the Answer

Debt consolidation loans are a great option for those with good credit who are burdened with credit card debt. A low-interest loan has the potential to save you money.

But you still owe and must pay the debt. You’re merely moving the debt from one place or bucket to another.

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