What Is Debt Consolidation? How It Works and When It Makes Sense

If math and finance aren’t your thing, don’t worry! Debt consolidation isn’t as complicated as it sounds, especially if you like the idea of fewer payments to manage every month.

Put simply, debt consolidation is when you roll multiple debts into one loan with a single monthly payment and often a lower interest rate. Debt consolidation doesn’t eliminate your debt – instead, it helps simplify your finances and make everything easier to track. Plus, if you’re able to get a lower rate, you can save on interest charges and pay off your debt faster.

Consolidation works for many types of debt, such as:

Credit cards
Store cards
Payday loans
Personal loans
Auto loans
Student loans
Lines of credit
Medical bills
Utility bills
Other big bills

Types of debt consolidation

There are a few different ways to consolidate your debt. The most popular options are usually balance transfers, personal loans and home equity loans. See what makes sense for you:

Credit card balance transfer
Some credit cards offer low-rate (as low as 0% APR*) balance transfers, which means you can move your balances from other credit cards and save on interest during the promotional period, typically lasting around 12 to 20 months. You can check your existing credit cards to see if they offer 0% balance transfers, and you might want to compare new card options.

Keep in mind, you usually have to pay a balance transfer fee of around 3% of the total balance you’re transferring. And after the promo period, your balance reverts to your standard credit card rate, which could be 20% APR or higher. If you won’t be able to pay off your debt during the promo period, a credit card balance transfer might not be the best choice.

Personal loan
Many people choose personal loans to consolidate debt thanks to their flexibility and stability. A personal loan provides a lump sum of money, which you can then use to pay off your other debts how you like. Personal loans generally offer fixed rates and terms, meaning you can depend on a steady monthly payment for the life of your loan.

Somerville’s Credit Union offers personal loans specifically designed for debt consolidation, with loan amounts up to $15,000 and rates as low as 9.99% APR.*

Home equity loans or lines of credit
If you’re a homeowner, you may want to tap into your home equity for more affordable debt consolidation. Home equity loans and home equity lines of credit often have lower rates than personal loans and offer additional benefits like longer repayment terms for lower monthly payments.

The downside is that your home acts as collateral, meaning if you fail to repay your debt, you risk losing your home. Like any loan, you’ll want to review the details and your repayment plan to make sure you’re making the right decision for your situation.

Is debt consolidation right for you?

Ask yourself a few questions to help decide if debt consolidation is right for you:

Do you have a healthy credit score? You’ll need good credit to qualify for most debt consolidation options.
Do you have high interest rates? If you’re able to lower your interest rates through debt consolidation, you could save big in interest charges.
Do you have a significant amount of debt? If your total debt is less than a couple thousand dollars and you plan to pay it off within the next year, it may not be worth the effort to consolidate.
Do you have financial issues to address first? If you overspend or can’t keep up with your bills, you may need to review your finances and make budget changes before consolidating debt.
Do you struggle to keep track of your debts? A big benefit of debt consolidation is simplifying your finances with one monthly payment instead of multiple payments.

Find out what’s right for you

By combining multiple balances into one payment, you may be able to reduce stress, simplify your finances, and even save on interest. Wondering if debt consolidation is the right move for you? Ask our team to review your situation and help you explore options that fit your goals.

*APR=Annual Percentage Rate. A 9.99% APR loan of $10,000 for 60 months has a monthly repayment of $212.42. Rates and terms are based on creditworthiness, loan amount, and repayment term, and are subject to change without notice. Not all applicants will qualify for the lowest rate. Actual payment amounts will vary based on the loan amount, term, and rate you qualify for. Loans subject to credit approval. Membership required; membership eligibility applies.