Debt consolidation calculator

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The Basics (FAQs)

Does debt consolidation really work?

Yes, debt consolidation can make it easier for you to pay off your credit card balances, student loans, car loans, and other amounts that you owe. Consolidating your debts can reduce your monthly payments and lower the interest rates that you pay.

Does debt consolidation hurt your credit?

No, debt consolidation using a home equity line of credit (HELOC) will not hurt your credit if you pay if off on schedule and do not miss any payments. In fact, debt consolidation can help raise your credit rating if you make your payments on time. After debt consolidation, your monthly payments could be lower. For many people, that makes it easier to meet their payment obligations on a regular basis. Credit bureaus often reward consistency with higher credit scores.

Is it a good idea to consolidate debt into your mortgage?

Usually. When you consolidate debt into your mortgage, via a cash-out refi, or a home equity line of credit, you may get significantly lower interest rates than you could get with a credit card or personal loan. Mortgages and HELOCs are known as secured loans, since you are using the equity you have built up in your home as collateral. As long as you are confident that you won't default on your loan, which would put your house at risk, consolidating debt into a home-equity-backed loan will save you money compared to higher-cost loan sources such as credit card balance transfers and cash advances. The reason a loan secured by your house typically has lower interest rates is because the lender has recourse to your house in case of default. Credit cards and personal loans are known as unsecured loans, since the lender has no recourse to an asset in case of default. Lenders charge higher interest rates to compensate for the increased risk.

When is debt consolidation a good idea?

Debt consolidation may benefit you when --

  • You have multiple bills, such as credit cards, student loans, and car payments, that you have to pay every month, and...
  • You want to make your life simpler by consolidating all those bills into one single payment, and...
  • You want to pay lower rate of interest, and...
  • You want that interest rate to be predictable and fixed, and...
  • You want to lower your monthly payments, and...
  • You have built up equity in your home that you can use to secure a loan

When is debt consolidation a bad idea?

Debt consolidation may not be a good choice for you if --

  • You don't have equity in your home, so you can’t qualify for a home equity line of credit or cash-out refi, or...
  • The debt you have is at lower interest rates than the rate begin offered you for a cash-out refi or a HELOC, or...
  • You don’t have a clear plan in place to avoid accumulating additional expensive debt that you will need to refinance later.

How debt consolidation is different from debt management and debt settlement

Debt management programs are used primarily for credit card relief, not for consolidating different types of loans. In fact, a debt management program may not even involve the taking out of a new loan. A credit counseling agency simply negotiates on your behalf to lower the interest rates and payments on your existing credit card account and to waive any fees. Working from an agreed-upon budget, you make a fixed monthly payment to the creditors. The goal is to pay off your credit card debt within three to five years. Keep in mind that:

  • Debt management programs may have rules and restrictions that limit what you can do with your personal finances. Some debt management programs, for example, do not allow you to borrow any more money until you pay off existing creditors. Debt consolidation, on the other hand, allows more freedom and flexibility. With some types of debt consolidation, such as Figure’s Home Equity Line, you can borrow from the original line of credit after you have paid off just part of the balance.
  • Under a debt management plan, you generally are limited to using just one of your credit card accounts until your creditors have been repaid. Debt consolidation does not restrict the way you can use your credit cards.
  • Lenders may see your use of debt management as a sign that you are having difficulties paying your debts. This stigma could make it harder for you to get credit in the future. Debt consolidation with a home equity loan sends a neutral message, not a negative one. It does not cause the problems that debt management may cause.

Sometimes, borrowers have so much debt that neither a debt consolidation nor a debt management program will get them out of the hole. Particularly if they are teetering on the edge of bankruptcy, they may decide that debt settlement is their last resort. The aim of debt settlement is not to consolidate debts but to negotiate a reduction in the amount of debt owed. To convince your creditors that they should settle for less than they are owed may require you to miss your scheduled payments for months on end. This approach comes with numerous risks:

  • Your creditors may no agree to negotiate for less than they are owed.
  • Late charges and accumulated interest will increase the balance owed on your accounts in your creditors will not reduce what you owe.
  • Your credit score will suffer; you may even be sued by the lenders.
  • Your credit accounts are likely to be closed after your payment of the negotiated amount, because lenders will not view you any longer as a desired customer.

Unlike the debt consolidation and debt management approaches, which keep credit balances intact but renegotiate payment terms, debt settlement reduces the balance owed, but at great risk to the borrower’s financial standing. Companies that specialize in this type of debt-reduction negotiation have a checkered reputation for charging sky-high fees that can erase at least part of your expected gains. Debt settlement is a last resort.

Bonus tip: Car loans and personal loans can be included in debt consolidation

Through debt consolidation, you can pay off more than just your credit cards. You can include car loans and personal loans in your single monthly payment. It can be a savvy move to refinance anything with a higher interest rate with a secured loan. Consolidating debts also simplifies your life and makes it easier for you to stay on top of your finances.

Figure’s Home Equity Line provides access to the full line of credit at closing, fixed interest rates, and the ability to borrow again when you’ve paid off part of the balance. Find out what rate you qualify for, with no obligations, in just a few minutes with a single click.