Loans > Debt Consolidation

Debt Consolidation

A guide to merging multiple, annoying debts into one that is on your terms.

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Updated January 10, 2022

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Getting out of debt is simple enough – pay everything off, and you’re done. Right? 

Wrong. The reality is about 100 times more complicated than that. 

Over 189 million Americans are in debt and most have 4+ credit cards and a mortgage. Thinking about making a bunch of payments each month, budgeting, and being care-free on top of everything is not something humans are generally good at.

However, humans are good at coming up with clever solutions and there is one if you want to make your debt as easy to manage as possible. Spoiler alert: it’s called debt consolidation.

Essentially, you can combine several debts into one, which can often have a longer payoff period and lower interest rates. Admittedly, dealing with one fly is easier than trying to swat an entire swarm simultaneously – even more so if the one fly flies on your terms (try saying that ten times fast).

For example, you can get a low-interest loan and use it to pay off multiple high-interest debts, meaning fewer expenses and more time to take care of business. Since we’re seeing historically low interest rates nowadays, it’s no wonder why debt consolidation loans have seen such a rise in popularity.

Sounds complicated? Just a bit of know-how and it won’t be for much longer. In this epic guide, we explain everything you need to know about debt consolidation. Whether you want to sort out your credit cards, get out of student debt, or evade an imminent bankruptcy, there is a fix. 🛠

Interested? Then let’s get straight to it and explain the types of debt consolidation, as well as the best-possible avenue you can take based on your situation.

What you’ll learn
  • What is Debt Consolidation?
  • Debt Management Plan (DMP)
  • Debt Consolidation Loan
  • Debt Settlement
  • How to Consolidate Student Loans
  • Advantages of Debt Consolidation
  • Risks of Debt Consolidation
  • Debt Consolidation Strategies

What is Debt Consolidation? 🤔

Consolidating debt means combining multiple debts into one. For instance, if you have 4 credit cards, as most Americans do – you would have a much easier time keeping track of them if your debts were merged into one.

What’s more, this single debt to replace all others can have favorable terms. This means a consolidated debt can often have lower interest rates and a more relaxed payment deadline.

Consolidation won’t get you out of debt, but it will restructure it and help you pay it off by making things simpler and cheaper. That’s the gist of it, but there’s more to how this works.

How Debt Consolidation Works 🛠️

First, we must point out that there are 3 main types of debt consolidation. These 3 are very different from each other: 

  • A data management plan (DMP) is a cheap service provided by nonprofits and can improve the terms of your debt.
  • A debt consolidation loan is a personal loan, preferably very cheap, that you use to pay off other debt.
  • Debt settlement implies getting a special agency to lower your debt by negotiating with your lenders.
Debt consolidation
Turn multiple debts into one with debt consolidation.

To figure out which one of these methods is best for you, we must explain how all forms of debt consolidation work. There are a number of benefits, as well as risks associated with all of these – so let’s go through the 3 main debt consolidation methods real quick, and you’ll know which one is best for you immediately after.

Debt Management Plan (DMP) 📋

This starts with you going to a debt management agency (a.k.a debt consulting agency). These agencies are nonprofits, meaning they are cheap, or even free, and they help debtors by managing their debt and negotiating better terms with their creditors.

It works like this – you talk to your advisor and they tell you everything you need to know about debt management and give you a few tips on how to pay everything off. They will also ask about your financial situation and make a realistic plan you can follow to pay off everything. 

Then, they sum up all your debt and you pay the agency instead of your lenders. Basically, you pool your cash into one place, and the agency sends it to the lenders promptly – this way, you only need to worry about a single monthly payment.

Meanwhile, your agency will negotiate with your creditors and try to get you better loan terms. Most of the time, this means getting your debt stretched out enough for you to pay it off easily, but it can also mean lower interest rates.

To “help” you out a bit more, all the involved lines of credit will be disabled so you can’t borrow through them. Sure, this will speed things up, but you should know this if you mean to use those credit cards. Also, keep in mind that a DMP isn’t available for all loans – student loans and secured debt will not be included in a DMP, but the agency can provide you guidance for that too.

The only fees you’ll encounter are the initial setup fee (usually $30-$50) and the monthly management fee (usually $20-$75), which is not that bad. It’s also possible that the agency will waive the fees if you have a low income.


  • Spreads out payments, making them more manageable
  • Financial counseling
  • Cheap or free
  • Doesn’t damage your credit score


  • Won’t lower the amount you have to pay
  • There’s no guarantee your agency will negotiate great terms with lenders
  • Will remove all involved credit account from your credit report – even good ones

The good thing about this is that it’s just restructuring your debt to make it easier on the pocket. Although your debt may be postponed, you won’t be missing any payments if you stick to the plan – this is why a DMP won’t damage your credit score. Rather, it can only improve it if you see it through.

Where to Get a Debt Management Plan 🏢

At the DMP store, of course! Actually, they are called debt management agencies. These nonprofits are also called debt counseling agencies because they provide guidance and free education to everyone who needs help with their credit. 

The agencies are all available online and usually communicate with clients via phone and email. Essentially, they are geared for clients’ peace of mind and ease of use. The fact that they are either cheap or free contributes to that.

Some of the popular names you’ll find online are NFCC and ACCC, but there are more good places to go for a DMP. You won’t go wrong with the two aforementioned agencies, but if you want to look at more options, here are a few things you should know before you start your research.

How to Find a Legitimate Debt Management Agency ✅

Sorting out the fraudsters from credible companies in the no. 1 priority here – as it is with most financial services. Employing a credit management agency means you will give them crucial personal data, as well as your money. 

What’s more, they will negotiate with your bank in your name, so you have to make sure they know their stuff. Here are a few things you should look at when discerning whether a given company is legitimate or a scam:

  • Nonprofit status – All legitimate credit management agencies are nonprofits, so check that first.
  • Certification – See if the company’s agents are certified professionals. They must have the so-called “credit counseling certification”.
  • Track record – If a company is new, that in it of itself can raise suspicion. Older agencies with a good reputation are always the safest option.
  • Regulation – If the agency you’re looking at is a member of a big national accreditation association like the NFCC, that’s a good sign, and the company probably trustworthy.
  • License – If a company doesn’t have a license to do business in your state, that’s a red flag above all red flags. 
  • Sensible fees – Remember, these are nonprofits and they’re not expensive. Monthly fees usually range from $20 to $50. Check multiple companies’ fees to get a feel for the prices.

Debt Consolidation Loan 💰

If you’re more of a DIY person and want to take care of matters personally, your first option might be a debt consolidation loan. This means taking out a personal loan, using it to pay off smaller debts (like all your credit card debt), and then focusing on paying off the one big debt.

So, why do this? If the big personal loan has a better interest rate and payment terms, you can save a bundle and stretch out your bills. For example, say you have four credit cards with interest rates ranging from 10% to 24%, and you have a year to pay off your debt. Now let’s say you find a personal loan with a 5% interest rate, and 3 years to pay it off.

This means lower interest rates and more time to pay everything off – not a bad deal. More time to pay means individual bills will be smaller than they would have been if they weren’t stretched out. 


  • “Combines” all your debt into one loan, simplifying things
  • If you find a good deal, you will save on interest rates
  • Can significantly stretch out your payments


  • Best deals require a great credit score
  • No counseling or assistance – you’re on your own
  • May incur origination and prepayment fees

Moreover, a debt consolidation loan will turn multiple debts into one, making everything much easier to manage. Having a single monthly payment sure beats having to think about 4 or more. So, more time, fewer expenses, and easier management – but what is the optimal loan you should aim for?

Is a Debt Consolidation Loan Right for You? 👍

A debt consolidation loan only makes sense if it’s a good one. Lower interest loan is what you’re looking for, and that requires a good credit score. If your credit is looking solid, you can check out the top loans for debt consolidation and see if you can find something that will solve a debt-induced headache.

But even if your credit score isn’t good, very good, or excellent, there still might be options to consider. Even if your consolidation loan doesn’t have an awesome interest rate, it can still stretch out your payments, making them easier to take care of.

Take a look at the premier bad credit loans if you’re looking for this kind of relief. Some of them even offer guaranteed approval.

Credit Card Consolidation 💳

You can get a new low-interest credit card to pay off other, high-interest cards. If you can pay off the new card quickly enough, you might even get off without any pesky interest rates.

💡 Looking to consolidate credit card debt? You’ll want to learn about the pros and cons of Payoff.

Some cards have a balance transfer feature you might want to consider. Doing a balance transfer means moving debt from one card to another with lower interest and bonus benefits.

Is it Better to Have a Personal Loan or Credit Card Debt?

This depends on your spending and borrowing habits. If you go with one of the best lenders for a personal loan, you’ll see a one-time cash boost with a fixed interest rate.

This means the amount of money you need to pay back will not change over time, which is usually a good thing. Personal loans also tend to have much lower interest rates than credit cards, which is why they’re a better option for big purchases.

However, a personal loan won’t allow you to borrow more every time you feel like it – you get money once, and that’s it. A credit card gives you an ability to borrow whenever you need the money, which is good for smaller, unplanned expenses. For example, having a credit card in your pocket during a medical emergency can be a saving grace.

A personal loan will almost always be cheaper and have better terms, but gives you a single amount of money. On the other hand, credit cards incur more expenses through debt but can be super-handy if you’re in a financial emergency or want to make small purchases. Nevertheless, since personal loans are the cheaper solution, here are a few suggestions for top debt consolidation loan lenders:

Estimated APR

6.99% - 24.99%

Varies (but known to be low)

Loan term

3 - 6 years


Loan amount

$3,500 - $40,000

$5,000 - $100,000

Best for

Best for  borrowers with good to excellent credit

Borrowers with good to excellent credit

Estimated APR

Varies (but known to be low)

8.99 - 23.43%

Loan term


2 - 7 years

Loan amount

$5,000 - $100,000

$5,000 - $100,000

Best for

Borrowers with good to excellent credit

Students and debt consolidation/home improvement borrowing


Estimated APR

6.99% - 24.99%

Varies (but known to be low)

8.99 - 23.43%

Loan term

3 - 6 years


2 - 7 years

Loan amount

$3,500 - $40,000

$5,000 - $100,000

$5,000 - $100,000

Best for

Best for  borrowers with good to excellent credit

Borrowers with good to excellent credit

Students and debt consolidation/home improvement borrowing

Debt Settlement 🏛️

Debt relief, also called debt settlement, is the riskiest and potentially the most alluring consolidation method. Here’s how debt settlement works:

It all starts with you going to a debt settlement company. You pay this company instead of your lenders, and they put your money in a trust fund – this means you are not making your debt payments, your credit score is going down, and your creditors are getting more and more annoyed. Not a great start thus far, but let’s go on.

Then, the debt settlement company will negotiate with your bank and try to get your debt lowered. If this works out your debt might be lowered anywhere from 10% to 70% or even more in some cases – basically, this can almost obliterate your debt if everything goes perfectly. 

Then, the money you put in the aforementioned trust fund is used to pay off the remainder of the debt – sounds pretty good now. But of course, it can’t be that good and isn’t. Even the most successful debt settlement will ruin your credit score because you will miss payments. 


  • May reduce the amount you need to pay dramatically
  • Can help you avoid bankruptcy
  • Is the most sensible option if you’re overwhelmed by debt


  • The lender might not accept the debt settlement and might sue you
  • Your credit score will get damaged
  • Debt settlement companies can be expensive

Also, debt settlement companies aren’t cheap and will charge a lofty sum for their services. You might also have to pay taxes based on the amount of debt you were forgiven, so be prepared for additional expenses.

What are the Risks of Debt Settlement? ⚠️

This was the best-case scenario, but let’s look at how the worst-possible outcome would look like. So, you give your money to the debt settlement company, and you start missing payments as they negotiate with your bank. The bank decides it doesn’t want to negotiate and sues you instead. 

In the end, this means you will have a damaged credit score, your debt will remain intact, and you’ll have a lawsuit hanging over your head. To top that off, the debt settlement company might still ask for their fee – we can agree that this is a pretty bad situation.

In essence, debt settlement can dramatically cut down your debt at the cost of your credit score, but it can also backfire in a major way. There are also scam companies you need to worry about. 

This image illustrates the process of debt settlement in 6 steps
Debt settlement is a process with potential risk.

A good example of this is a fraud company that has been going around college campuses claiming it can remove student loans for a fee. The COVID-19 epidemic has left many students unable to pay off their debt, so naturally, fraudsters have found ways to exploit this. Watch out for scams and only turn to well-known debt settlement companies with long track records if debt settlement is your goal.

How to Consolidate Student Loans 🎓

Private Debt Consolidation ✅

The first way of doing this is through a personal private loan, a.k.a. refinancing. Essentially, you can take your federal and private student loans and pay them off in one fell swoop through a new, bigger personal loan. 

So, this is just your run-to-the-mill debt consolidation loan – it can lower your interest and stretch out your payments if you get a good deal. However, consolidating like this will make you ineligible for a federal student loan program.

CompanyAPRBorrowing AmountsRepayment Terms
Marcus by Goldman Sachs6.99%-19.99%$3,500-$40,00036-72 months
Discover6.99%-24.99% $2500-$35,00036-84 months
LightstreamVaries$5,000-$100,000See website

Student Loan Programs ✅

This is the fourth, niche consolidation method made to help students through government programs. Federal consolidations were made to tackle the record-high amount of student debt, that’s now just over $1.5 trillion. Consolidating your student debt through a private personal loan might be a good option in many cases, but a federal consolidation has some extra benefits.

US Education Debt Sentence
Rapid Increase of student loan debt over the past 14 years

If you are eligible for federal consolidation, you can merge your student loans and will get to pay off a single debt over a longer period. The postponed terms will be based on your income, so you have an easy time making all monthly payments. This seems like a relief but can mean you have to pay more money in total because of the accruing interest rate, so make sure to plan ahead.

The biggest risk of a federal consolidation program is that you can lose your eligibility. If you go to a private lender to consolidate parts of your student loan, you lose all the benefits – the government is a jealous mistress. If getting a federal consolidation is what you need, it’s best to check out official info on the government website and see what’s what.

In the recent economic turmoil, the government has started forgiving student debt to users with federal loans – this is another avenue you can try. However, the approval rate of the loan forgiveness requests is just under 1.5%, which is the government basically saying – “don’t get your hopes up”. Trying to get your loan removed might be a long shot, but you should definitely try it before anything else.

FeaturesPrivate student debt refinancingFederal student loan program
Can save you moneyYES - in can decrease the interest rates which can save you moneyNO - the interest will remain the same over time, so you will eventually pay more in total
Can stretch out paymentsYESYES
What loans can be combined?Private and federal loansFederal loans only

Advantages of Debt Consolidation 👍

DMP: A debt management plan is the most lightweight of all consolidation methods. A successful DMP will consolidate your debt, give you more time to pay it off, and possibly lower your interest rates.

The second advantage is its convenience. Your agency will deal with your lenders for you and will provide you with guidance and information whenever you need it.

In essence, a DMP has an inherent educational value, as well as some objective benefits. This method will not damage your credit score and is the safest consolidation method.

Debt consolidation loan: If you find a good consolidation loan, that means you can have a single debt with much lower interest and better terms. However, this method doesn’t give you an advisor like a DMP does – you’re on your own. If you are comfortable with managing your debt and manage to get a good offer, a debt consolidation loan is a great option.

Credit score factors
The main credit score factors.

Debt settlement: The advantage is twofold here – all the work is done by your debt settlement agency, and if they succeed, you can get your debt lowered dramatically. This is the riskiest debt consolidation method, but it can be your best bet if you’re facing bankruptcy. Even though a debt settlement will damage your credit score, a bankruptcy will hurt it much more and remain on your credit report for 10 years.

What are the Risks of Debt Consolidation? ⚠️

DMP: The first disadvantage is very straightforward – you have to make a payment every single month without fail. Missed payments can end your DMP, which means that the lowered interest rates and stretched-out payment terms will be rolled back to their previous state.

The second problem is the fact that all accounts involved in your DMP will be closed. This means you won’t be able to use your credit cards when your plan starts. Also, all involved accounts will be gone from your credit report forever. 

This means that the good items in your credit report that are related to this account will also be gone. Essentially, you won’t get negative items in your credit report, but you will have to rebuild the good ones. This is why a primary step of debt consolidation is first learning how to understand a credit report.

To solve this, you can get someone with an old credit account to sign you as an authorized user. The age of their credit will be copied into your report, and you will get all the benefits.

Key credit score factors
If you can positively influence the main credit score factors, maybe you don’t need to consolidate debt.

Debt consolidation loan: Even if you qualify for a great loan and get it, there are some risks and disadvantages involved with this method. Should you fail to pay off your consolidated debt, you will damage your credit score – also, just getting a debt consolidation loan will cause a temporary dip in your credit score. 

Aside from this, the only problem is that you’ll be in debt longer. Just in case, look for the best available personal loans without prepayment fees so you can take care of the debt earlier if possible.

Debt settlement: The risks are aplenty when it comes to debt settlement. First of all, this method will damage your credit score, and it doesn’t guarantee success.

According to the AFCC, 76% of debtors have success with debt settlement for their first account, and the average removed debt is 48%. You’ll likely see more encouraging numbers in advertisements, but ads rarely speak the truth.

If your debt settlement fails, you can get sued by your lenders, your credit score will drop, and your debt will remain intact – this is the biggest reason why debt settlement shouldn’t be taken lightly. Also, you have to make regular payments to the debt settlement company as soon as you sign up for their service. Most of these funds will be used for paying off your debt, but a sizable chunk will go to the company.

Scam debt settlement companies are also out and about, but that’s not the only concerning fact. American legislature is cracking down on debt settlement companies, essentially preventing them from doing business in some states. It’s best to see the recent news in your state before signing up for a debt settlement program.

What is the Smartest Way to Consolidate Debt? 🧠

Being smart about debt consolidation means knowing your situation and responding appropriately. Each type of debt consolidation is good for one kind of problem and potentially terrible for other problems. Here’s a quick illustration.

Situation A:  You have a solid credit score that makes you eligible for the leading loans for good credit, or better. In this case, you can get a low-interest debt consolidation loan, and take care of your other debt, saving money in the process. 

Situation B: Your credit score isn’t great and your income isn’t huge compared to your debt, but you still haven’t missed too many payments. A DMP might be the right choice in this scenario. 

Debt management agencies are cheap and they will waive their fees if your income is low. Moreover, such agencies provide advice and can lower interest rates and stretch out your bills. As long as you stick to their plan, your debt is on a highway to oblivion.

Situation C: Life hasn’t been kind and you’re now overwhelmed with debt, can’t make your monthly payments, and are slowly nearing bankruptcy. Although risky, debt settlement can salvage this kind of situation.

If you go to a legitimate debt settlement company, they are likely to cut your debt down by half or even more. However, this will cost you – be prepared to pay the company, pay taxes on the forgiven debt, and brace yourself for the hit your credit score will take. Debt settlement is the only consolidation method that can backfire even if you do everything right, so only consider it after all safer options have been exhausted.

When You Should Not Consolidate Debt 🚨

First of all, debt consolidation will cause a dip (or more than a dip) in your credit score in every scenario. So, if you can take care of your debt, and consolidation isn’t necessary – pay everything off. If possible, this is the best option because your credit score won’t be affected in any negative way.

If your credit is too low to get a solid debt consolidation loan, you probably shouldn’t get one – no need to increase your debt by getting a bad consolidation loan. The main problem DMPs is that they remove all involved credit accounts, so your hears of good history are erased from your credit report as well. Debt settlement comes with a bucket load of problems and risks, so it should only be considered if there are no other options.

Remember, debt consolidation can not get you out of debt – but it can restructure it, making the job easier for you. So, if you can’t get a deal that will make things cheaper and easier for you, then there’s really no point to debt consolidation. Only consolidate debt if necessary or if you’ve got a great credit score and want to simplify things with a consolidation loan.

How to Manage Your Debt? 🧮

Whether you want to consolidate your debt or not is up to you, but whatever the case, you still need to keep a finger on the pulse of your finances. Let’s talk about some ways you can make managing debt easier and less time-consuming.

Know How Much You Owe, and to Whom ✅

To start things off, create a list of all your lenders, your debt to them, and your monthly payments. With this, you will have an overview of all your obligations, as well as a rough idea of when you’ll be able to pay everything off.

Make a Calendar and Stick to it ✅

Make sure you schedule all your monthly payments. Timely payments will improve your credit score, and more importantly, keep pesky collectors away. Getting every payment on time is the most important credit factor, so treat this as your priority.

Focus on the High-Interest Debt ✅

Your high-interest credit cards should be taken care of first. If you’ve got some extra cash, use it to take care of the expensive stuff, and pay the minimum amount for everything else. You can eliminate your debts one by one like this, starting with the most expensive one.

Good Accounts Come First ✅

Missing a payment can incur charge-offs and collection fees. Should you get these, keep calm and don’t neglect your good accounts just to pay other overdue bills. Good accounts improve your credit score and are a deterrent for more annoying collectors – that’s why maintaining them should take priority over fixing one bad debt.

Save up for Emergencies ✅

If you have some room to move around after making all your payments, save some cash for emergencies. Keep in mind that getting rid of debt means you shouldn’t be borrowing – it’s best to have an emergency fund, or else you’ll be forced to use a credit card in case of an unplanned medical expense, for example.

Be Aware of Your Situation – Seek Help if You Need It ✅

Making short work of your debt isn’t a quick job – it takes discipline and will probably need to change your spending habits. Sometimes, debt can be overwhelming, which is why a consolidation loan or a DMP may come in handy.

If organizing and managing everything on your own is the problem, there are few tools and services you might find handy. There are a few useful free programs you can use to track your finances, monitor your FICO, and make sure you pay everything on time. 

A more comprehensive option would be getting a company to take care of that and protect you from identity theft. If this is what you’re looking for, check out the top credit monitoring services, both free and not-so-free, to see what they can do.

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.