Debt consolidation is combining several debts into one new loan or balance with a single payment. It replaces multiple due dates and rates with one, and the overall cost depends on the terms of the new loan.
Debt consolidation rolls multiple existing balances into one new obligation so you make a single payment instead of several. It can be done with a debt consolidation loan, a balance-transfer credit card, or another credit product, and it replaces several due dates and rates with one. Whether consolidation changes the total cost depends on the interest rate, the fees, and the term of the new loan compared with the debts it replaces. The result can extend or shorten the time in repayment depending on the new term. Consolidation is distinct from debt settlement, which involves negotiating to repay less than the full amount owed.
Consolidation works by replacing several payments with one. The new loan pays off the old balances, and the borrower then repays the new loan on its own schedule. Whether that helps depends on the new loan's cost and length compared with the debts it replaces.
Consolidation changes the structure of debt, not the amount owed. If the old accounts, such as credit cards, stay open and are used again, the borrower can end up with both the new loan and new balances. Reviewing the total cost in writing, and the length of the new schedule, shows whether consolidation reduces what will be paid overall.
A consolidation loan can also change what is at stake. Moving unsecured card balances into a loan secured by a home or a car turns debts that had no collateral into a debt that does, so what the new loan is secured by is part of the comparison, not just the rate and the payment.
An example
A borrower has balances on two store cards with different due dates and considers a single installment loan to pay both off. Before deciding, the borrower adds up what the cards would cost at current payments and compares it with the total of payments on the new loan, then decides whether one fixed schedule is worth it.
Common misconceptions
Myth: Consolidating debt reduces the amount you owe.
In fact: It moves existing balances into a new loan. The amount owed stays the same; the rate, schedule and number of payments are what change.
Myth: Debt consolidation is the same as debt settlement.
In fact: Consolidation repays debts in full with new credit. Settlement negotiates to pay less than the full balance, which works very differently.
Myth: A single payment always means a lower total cost.
In fact: A longer schedule can make the single payment smaller while raising the total paid. The total of payments is the figure to compare.
What to check
- The total cost of the new loan compared with the debts it replaces.
- How long the new schedule runs.
- Whether the old accounts will stay open.
- Any charges for paying off the old balances early.
How this applies at Desert Rock Capital
Desert Rock Capital lends $100 to $3,000, so a loan here can only cover smaller balances. If you need more than $3,000, a bank or credit union that lends larger amounts is the better place to start. For amounts in our range, the loan is repaid in fixed biweekly payments, and every payment and the total cost are in writing before you sign.
Based on our loan requirements, loan amounts and application pages. Your actual terms are in the loan agreement.