Sometimes, debt takes on a life of its own.

Even if you're responsible with money, surprises can catch you off guard and, before you know it, one loan turns into an insurmountable pile of debt.

It’s easy to get in over your head.

If you're paying what you can, but your loan or credit card balances are barely moving, it can feel like you’ll be in debt forever! This is just one of the reasons people find it so difficult to get out of debt.

Should I Consolidate Debt?

Debt consolidation may be a good option for you if:

• You have the income and credit to qualify for a new loan, and
• You can meaningfully reduce the interest rate on your debt by consolidating.

Consolidating debt can relieve some of the pressure on your budget, or simply reduce the number of creditors you need to pay each month. In many cases, consolidating your outstanding debt into a single loan can lower your monthly payments, save you money on interest, or both.

However, not all consolidation loans are created equally. There are many alternatives, each with their own pros and cons. The option that's right for you will depend on:

• What kind of debt you have
• The total amount of your debt
• Your creditworthiness and income

Read on to get all the information you need to decide which type of debt consolidation is best for you. We'll also cover exactly how to get started and offer some tips for avoiding the most common debt consolidation mistakes.

What is Debt Consolidation?

Debt consolidation is simply the process of taking out a single loan or credit card and using the proceeds to pay off multiple loans or credit card balances.

The two types of debt that are most commonly consolidated are credit card debt and student loan debt. But, you can also use debt consolidation for payday loans, personal loans, or medical bills.

It’s important to note that debt consolidation doesn’t reduce the amount of debt you owe. In fact, if you pay transfer fees or loan origination fees, you may end up owing more than you did when you started. However, in most cases, the benefits of consolidation make the upfront costs worthwhile in the long run.

Benefits of Debt Consolidation

You may wonder why you should bother with the hassle of consolidating your debt, especially when you’ll likely end up paying extra fees? There are actually several very compelling reasons. Let’s look at an example.

Imagine that you had five credit cards totaling $20,000 in outstanding debt. For this example, we’ll assume the interest rates averag 18.5% and the minimum monthly payments for all five cards totaled $500. In this case, it would take you five years to pay off your debt.

Now, imagine that you’re able to take out a $20,000 loan with a 5-year repayment schedule and a 10% interest rate. Your new minimum payment would be approximately $425 for the same debt and same repayment period.

The new, lower payment gives you two options to solve your debt problems:

The first is to use the monthly savings of $75 to give yourself a little bit of financial breathing room.

This might be the best option if you didn’t have enough cash flow to keep up with your previous $500 monthly payment.

The second option is to continue paying $500 per month so that you can pay off your loan even sooner.

How would these choices impact you?

In the first scenario, you would have an extra $75 per month to support current lifestyle so that you hopefully don't accumulate additional debt, while still saving $900 per year in interest payments. Over the five-year period, you’ll save $4,503. This is a huge benefit, but what if you went one step further and used the extra money to increase your loan payment? This would put you back at your original $500 per month payment while shaving an additional 0.9 years off your repayment schedule. This would allow you to pay the loan off in just 4.1 years and save $1,067 over the life of the loan.

These numbers will obviously vary for each person's individual scenario, but you can see what a huge difference consolidation can make. If you want to see what your consolidation numbers would look like, check out our debt consolidation calculator.

Another advantage is you’ll enjoy the freedom and convenience of dealing with one single loan instead of trying to juggle five credit card payments. It makes life easier, and it reduces the very real risk that you'll miss a payment, incur late fees, and tarnish your credit.

Depending on your credit history, debt consolidation may also give your credit score a much-needed boost. Once you’ve consolidated to a single loan and establish a track record of on-time payments, you should see a positive improvement in your credit score over time.

Now that you understand the benefits of consolidation, the next step is figuring out exactly how you’re going to consolidate that debt.

There are multiple options so it's important to weigh the pros and cons of each to decide which is best for your situation.

5 Methods for Consolidating Debt

The five most popular debt consolidation options are:

1. Home equity
2. Personal loans
3. Credit card balance transfers
4. Student loan refinancing
5. Debt consolidation services

1. Home Equity or Mortgage Refinancing

If you're a homeowner then consolidating your debts with a home equity loan or line of credit (HELOC) is likely to be the least expensive option. Home equity loans typically offer lower interest rates than most other loan types because you’re putting your home up as collateral.

In some cases, you may also be able to refinance your mortgage for more than you owe and withdraw the difference as cash to pay off your debts.

However, both of these are options are risky propositions. You’re converting unsecured debt into secured debt.

If you stop repaying a credit card, personal loan, medical bill, or any other unsecured debt, your creditor will have to sue you to attempt to collect the unpaid balance. They might be successful, they might not. However, even if they're successful, the worst that can happen is a judge will place a lien on your property or garnish a percentage of your wages.

Home equity loans — just like mortgages — are secured by your home, which means if you're unable to make the minimum monthly payments then the lender can foreclose on your home. Until the loan is paid off, the bank has the legal right to the value of your home, and can take it once certain conditions are met.

Therefore, while home equity can be an inexpensive way to consolidate debt,  you’ll only want to consider this option if you’re absolutely sure you have sufficient cash flow to easily meet the monthly payment requirements. If not, it's not worth risking the roof over your head.

If you want to explore home equity or refinancing as a debt consolidation option, LendingTree is a convenient website to obtain no-obligation rate quotes for all kinds of mortgage products. Get your personalized rates in 5 minutes here.

2. Personal Loans

Personal loans are the fastest-growing type of unsecured debt. Since these loans aren't backed by collateral, the rate you’ll pay (and whether you’ll get approved at all) will depend in large part on your credit score. They’re an excellent option for consolidating multiple loans, particularly if you already have good credit.

You can get personal loans through banks, credit unions, personal finance companies, peer-to-peer lenders, and online direct personal loan lenders like these.

If you have excellent credit, direct online lenders often offer great rates, fast approval, and prompt delivery times. In some cases, they can approve and transfer funds in as little as a day or two.

If you have poor credit, direct online lenders will also offer the best chance of approval, but they may be willing to loan less money and will inevitably charge higher interest rates than you're already paying, which defeats the largest benefit to consolidation.

If your credit is somewhere in the middle — okay, but not great — then a local credit union may offer a better chance of approval at a fair interest rate.

If you're curious about whether a personal loan could help you consolidate debt, these websites will show you the best personal loan rates, loan amounts, and monthly payments based on your individual situation. They're free to use, do not affect your credit score, and come with no obligation to apply for a loan.

Learn more about how to use personal loans responsibly in our complete guide.

3. Balance Transfer Credit Cards

If you're looking to consolidate credit card debt and only owe a modest amount, a 0% balance transfer credit card could be the right answer for you. However, approach this option carefully.

Credit card balance transfers are usually best when you owe no more than a few thousand dollars.

The zero-percent rate is offered for a set period of time (usually between 12 and 24 months).

If you haven't paid the balance in full by the time the offer expires, the remaining balance will be subject to the credit card's regular interest rate, which can be quite high.

Most cards also charge a balance transfer fee that amounts to between 3 and 5 percent of the balance transferred.

Before considering using a zero-percent interest rate offer, make sure you read all of the fine print and understand every detail. Then, figure out the payment schedule you’ll need to adhere to in order to ensure you can pay your balances in full before the promotional period ends. If you want to be safe, plan to pay the total off at least one month before the deadline.

4. Student Loan Consolidation

Most people graduate from college with multiple student loans. These loans often have different interest rates, terms, and repayment periods. Keeping track of them all is a hassle and consolidating them will almost always put you in a better financial position.

Federal Student Loan Consolidation

If you only have federal student loans, you may consider consolidating them using a Direct Consolidation Loan through the U.S. Department of Education. Doing so can also give you access to additional loan repayment plans and certain loan forgiveness programs. In many cases, you’ll also be able to remove the uncertainty of variable rate loans by consolidating them into a fixed-rate product.

Before moving forward with this, however, you’ll want to take a close look at the terms of your current loans and make sure you won’t lose any valuable benefits or credits by transferring your balances to a new loan. It’s also important to note that this option only works for Federal loans. If you have private loans or a mix of the two, then you’ll need to explore working with a private lender.

Private Student Loan Refinancing

Consolidating student loans through private lenders is often referred to as refinancing. This option could help you get a better interest rate, but you may find that it’s also more difficult to qualify.

Since Federal loans offer favorable repayment plans and forgiveness programs that you won't find with a private lender, you’ll want to think twice about rolling them into a private loan. It may still be a good idea if the rate is significantly lower and you don’t need these types of options. Before making a decision, you’ll want to ensure that you understand everything completely and weigh the pros and cons carefully.

If you only have private loans, then consolidating them through a new private lender will work in much the same way as consolidating credit cards using a personal loan. Many banks and credit unions offer student loan consolidations. However, online direct lenders are often the best choice. There are many websites available that allow you to compare offers from various lenders, which is a smart thing to do before you make your final decision.

5. Debt Consolidation Companies

There are various names that “debt consolidation” companies operate under. They may call their product debt consolidation, debt management, credit counseling, or a number of other things.

These companies should be considered an absolute last resort. If your credit is poor enough that you cannot qualify for other kinds of debt consolidation, using one of these firms may keep you out of bankruptcy, but it will cost you.

You should also know that these companies often don’t consolidate your debts into one loan. Rather, they serve as a middle man between you and your creditors. You send the company one monthly payment, and they distribute it among your various loans and credit cards. Sometimes, they can negotiate lower interest rates or minimum payments with your lenders. But, you must pay them a hefty monthly fee for using their services, which can offset any negotiated savings.

Finally, using these companies will almost always have negative consequences for your credit in the short-term. That's because your creditors will report to the credit bureaus that you are repaying your debt under modified terms, which goes on your credit report as a negative remark.

While some debt consolidation companies are reputable, there are also a ton of debt consolidation scams out there. If you decide to pursue this option, be very careful. Do your research, ask a lot of questions, and always trust your gut.

Is Debt Consolidation Always a Good Idea?

Although we’ve discussed the many benefits of debt consolidation, it’s important to note that there are situations when it’s not a good move. Generally, you’ll only want to consolidate your debt if the new loan will give you a lower payment and/or a lower interest rate.

Remember, also, that your new loan may offer you a lower payment simply by extending the amount of time you have to repay your loan. The longer you hold debt, the more total interest you’ll pay. That’s why it’s better to pay more than your minimum payment each month.

To see this in action, try our debt reduction calculator.

Getting out of debt is always a challenge, in part because it requires planning, discipline, and some major lifestyle changes. While consolidating your debt is an excellent first step towards financial freedom, it won’t do you any good if you aren’t prepared to follow through.

5 Debt Consolidation Mistakes to Avoid

Make sure you get started off on the right foot by avoiding the most common mistakes people make when consolidating their debts.

Mistake #1: Not Learning from the Past

If you’ve accumulated more debt than you can comfortably handle, the first step is to look at how you got there. You have to solve the underlying spending problem. That means committing to fundamental changes in how you handle money or reducing lifestyle because the alternative is to end up in the same situation again.

Now is also a great time to look back at your spending habits and identify triggers. Do you tend to impulse-buy when shopping online? Do you spend more than you can afford on gifts for loved ones, or eat out at expensive restaurants more often than you should? Once you notice patterns, you can make conscious efforts to change them so you don't charge up new debt.

Mistake #2: Forgetting to Set Up An Emergency Fund

After you’ve consolidated your debt, it’s easy to become hyper-focused on paying it down. However, it’s important not to neglect savings. Without an emergency fund, one little incident can easily throw you back into debt.

While you’ll want to commit to paying as much as you can on your outstanding loan balance, make sure you also set aside at least a little bit for your emergency fund each month. The general rule of thumb is to keep the equivalent of three to six months of fixed expenses in a liquid account. If you have at least a few hundred dollars saved up, this can keep you from having to turn to credit cards when something unexpected comes along.

If saving seems impossible, there are a number of personal finance apps that can help you track your expenses and budget, and even some so-called microsavings apps that use technology to automatically help you start saving small amounts.

Mistake #3: Racking up New Debt

If you consolidate credit card debt, it’s also absolutely critical not to run those card balances back up. Consolidating all of your outstanding balances into a single loan will ultimately free up thousands of dollars in credit. Do not use it!

If you fall back into your old charging habits, you’ll end up with twice the amount of debt and far fewer options for digging yourself out again. This is a recipe for disaster.

Choose one credit card with a low rate and no annual fee and hold onto that for emergencies. Then, cut up the rest so you’re not tempted to use them. If you don’t think that’s enough to keep you from accessing the credit, consider closing the cards. While closing credit cards can pull down your credit score, it may be worth it if it helps you control excess spending.

Mistake #4: Failing to Have a Plan

You’ve heard the cliché “Failing to plan is planning to fail.” This is particularly true when it comes to paying down your debt.

It’s important to remember that debt consolidation isn’t the same as debt elimination. When you consolidate your loans, you’re simply rearranging them. To make serious strides in getting yourself out of debt, you need to change the way you think about money. This includes tracking your budget and coming up with a plan to help you spend less, save more, and only pay cash for future purchases.

Sometimes, making real progress will require hard decisions. Start by ruthlessly cutting out unnecessary expenses including dining out, grabbing coffee on your way to work, and maybe even that Netflix subscription. Small spending cuts may not seem like a big deal, but when taken together over time, they can accumulate into significant savings.

If you don’t have enough income to make your plan work, then consider selling some unneeded items, picking up a side job, getting a roommate, or even downsizing your home.

Mistake #5: Not Tracking Your Progress

Do the calculations so that you know exactly how much you need to pay each month and when your debt will be paid off. Your repayment period will likely span over several years, so it’s important to check in once in a while to make sure everything is still working according to the plan.

Consider using a free cash flow tracking app like Personal Capital to monitor your expenses. If you use a credit card for online purchases or emergencies, make sure you pay it off in full each month. Tracking your spending and checking your debt and savings balances at least once a month will help you quickly notice when you start to stray from the plan. This will allow you to make proactive changes before they compound into a real problem.

Final Thoughts

When used correctly, debt consolidation is an extremely valuable tool. Whether you’re in over your head with outstanding debt or you just want to make the smartest possible financial moves, it’s worth learning how consolidation can help.

Don’t forget to weigh the pros and cons of your various consolidation options before making a move. Then, create a plan to pay off your debt and make sure you’re mentally prepared to follow through. Taking these steps will put you on a fast track towards achieving financial freedom and building true wealth.