If you’re having trouble keeping up with multiple debts, bill consolidation could be a solution. Bill consolidation is the process of combining multiple bills (like medical bills and credit card bills) into a single debt by taking out a new loan.
A personal loan to consolidate bills could help you get a lower interest rate if you’re burdened with high-interest debt. But before you apply for this type of loan, you should consider all the pros and cons.
- What is a bill consolidation loan?
- When does a bill consolidation loan make sense?
- How to consolidate your debt with a bill consolidation loan
- What to consider when choosing a lender
- Bill consolidation loan FAQs
- Bill consolidation loan alternatives
A bill consolidation loan — also known as a debt consolidation loan — is a personal loan that you use to pay off your existing debt. If you’re approved for one, a lender will issue you a lump sum of money that you can then use to pay off your bills. Or, the lender may use the funds to pay your creditors directly. Then you’ll start making payments on the new loan with one monthly payment.
Some advantages of taking out a debt consolidation loan include reducing the number of bills you have to keep track of and potentially lowering your interest rate and monthly payment amount. But some lenders may charge an origination fee for processing the loan, which is typically deducted from your loan amount. Before you accept the loan, be sure you understand any and all fees.
Taking out a bill consolidation could be a good financial move in the following scenarios:
You want a lower monthly payment
If you’re having trouble keeping up with your monthly payments, loan consolidation may reduce the amount you pay each month. This could be the case if you get a lower interest rate or replace an existing debt with a loan that has a longer repayment period. Just keep in mind that choosing a longer repayment period will likely mean paying more interest over time.
You want a single payment
Keeping up with multiple bill payments can be a challenge. And if you miss a payment, it could lower your credit score and result in late fees. A bill consolidation loan combines your monthly payments into one. As a result, you may be less likely to make late payments, which could save you money and help you avoid damaging your credit.
You want a lower interest rate
If your credit score and finances have improved since taking on debt, you may qualify for a lower interest rate with a bill consolidation loan. This could help you save money on interest and help you get out of debt much faster, especially if you’re consolidating high-interest credit card debt.
If taking out a bill consolidation loan makes sense for you, here’s what you should do to consolidate your debt:
- Make a list of your debts. Create a list of all the debts you want to consolidate. Add up the total, so you know exactly how much you need to borrow.
- Compare lenders. Research and compare different lenders. This will help ensure you find the lowest rates and best option for your situation.
- Get prequalified. Prequalify with as many lenders as possible to get an idea of the rates and terms you might receive if you’re approved.
- Choose the best loan for you. Once you’ve compared multiple loan options, choose the best lender for your circumstances.
- Submit a loan application. After you’ve chosen a lender, submit a formal loan application. The lender will review your credit score, income, debt-to-income (DTI) ratio, and other key factors to determine whether you qualify.
- Receive your loan funds. If you’re approved for a loan, your loan funds are generally deposited into your account after you sign your loan agreement. This typically takes from one to seven business days, depending on the lender.
- Pay off your debts. Use the loan funds to pay off the debts you wish to consolidate, if your lender doesn’t pay off your debts directly.
- Make payments on your bill consolidation loan. Repay your loan as agreed — remember to make on-time payments so you can avoid potential late fees. Enroll in autopay, if possible, or use a bill management app to keep track of when your payment is due.
When you’re shopping for a personal loan, it’s important to compare lenders and rates. This helps you find the best deal available. A few things you should consider when comparison shopping include:
- Annual percentage rate — Your loan’s APR takes into account your interest rate plus any fees. It’s an important number because it helps you understand the true cost of the loan.
- Fees — Origination fees, late fees, and prepayment penalties are all common types of personal loan fees. If possible, choose a lender that has no origination fee so that all the funds you receive go toward consolidating your debts.
- Time to fund — Think about how soon you need the loan funds. Some lenders can issue your funds as soon as the next business day, but others may take much longer. If you need your money fast, choose a lender that’s known for quick funding.
- Minimum credit score — Different lenders have different minimum credit score requirements. While some lenders will approve borrowers with fair credit, other lenders will require you to have good to excellent credit.
- Lender perks — Many lenders offer additional benefits, such as free credit monitoring and tailored monthly payments. These may be a factor in your decision.
Which types of debt can I consolidate?
You can use your loan funds to consolidate several types of debt, such as credit card bills, utility bills, payday loans, and more. But before you take out a debt consolidation loan, check with the lender to see if it has any usage restrictions for borrowers. Some lenders may prohibit you from using personal loan funds for student loan debt.
Do I have to consolidate all my debt?
You’re allowed to choose which debts you want to roll into a debt consolidation loan. Consolidating all your debts may not be possible based on the loan amount you receive. Plus, consolidating some debts may not make sense if it leads to a higher interest rate.
Does debt consolidation hurt my credit score?
When you apply for a debt consolidation loan, a lender performs a hard credit check to review your credit history. As a result, your credit score could temporarily drop by up to five points, FICO says. But if you repay your loan on time, it will add positive payment history to your credit reports, which could boost your score over time.
When it comes to simplifying your bills and potentially lowering your interest rate, a debt consolidation loan isn’t your only option. Here are some alternatives to consider.
Balance transfer credit card
Looking to consolidate credit card debt? A balance transfer credit card allows you to transfer a balance from one credit card to another, and many offer an introductory 0% or low interest rate for a certain period of time.
By taking advantage of one of these offers, you could save a lot of money on interest. The downside is that once the promotional period expires, you’ll have to pay the credit card’s standard interest rate on any remaining balance. In addition, you may have to pay a balance transfer fee, which typically ranges from 3% to 5% of the transfer amount.
Student loan refinancing
If you have student loans and want to consolidate them, student loan refinancing is likely a better option than a bill consolidation loan. When you refinance your student loans, you take out a private student loan to pay off your existing federal or private student loans.
If you have good credit and a decent income, you may qualify for a lower interest rate. The downside is that if you refinance your federal student loans, you’ll lose access to federal benefits, such as income-driven repayment plans and forbearance.
The debt avalanche method
If you don’t want to consolidate or refinance your debt, you can use a debt repayment strategy to efficiently eliminate your debt.
With the debt avalanche method, you pay off your highest-interest debt first. You put any extra money you have toward this debt while making the minimum payments on your other debts. Once that debt is paid off, you move on to the debt with the next-highest interest rate.
A pro of this method is that it helps you save the most in interest. But it could take you a long time to pay off your debt with the highest interest rate if it’s a large amount.
The debt snowball method
The debt snowball method is another popular method you can use. With this repayment strategy, you pay off your debt with the smallest balance first. This means putting any extra money toward that debt while making the minimum monthly payments on your other debts. Once that debt is eliminated, you move on to paying off the debt with the next-smallest balance.
A major advantage of the debt snowball method is that you’ll knock out your smaller debts faster. When you see this progress, it can motivate you to continue chipping away at your debts. But the downside is that you may pay more in interest with this strategy, since your high-interest debts may not be the first ones you focus on.
Home equity loan or home equity line of credit
If you’re a homeowner, you may be able to tap the equity in your home by taking out a home equity loan or home equity line of credit (HELOC).
Since these loans are secured by your home, they may come with lower interest rates than you’d get with an unsecured personal loan. But you’ll risk foreclosure of your home if you default on the loan.