Millions of Americans are saddled with debt. Debt from credit cards, medical bills, student loans, homes, and cars. When you have debt, particularly high-interest debt, it can be tough or downright impossible to make progress on your financial goals like buying for a home, starting a business, and saving for your retirement.

If you find yourself struggling with debt, you have options. Debt consolidation is one option, and it comes in several forms meaning there is a type for different kinds of debt and a kind that will work best for your situation.

Consolidating debt can be a tremendously helpful financial tool. These loans can pay off high-interest debt, improve your credit score, and simplify your bill-paying every month. We’ll explain everything you need to know about debt consolidation is so that you can get out from under your debt faster and more efficiently.

What is Debt Consolidation?

Debt consolidation means taking out a new loan to pay off an existing debt, usually unsecured debt, which is debt not backed by collateral. Several debts are combined into one larger debt. In some cases, the consumer gets the money directly and uses it to pay off debts themselves, and in others, the institution making the loan pays the old debts directly on the consumer’s behalf.

How does taking on new debt help your financial situation? Because if your credit score is good enough, you’ll typically be able to get a lower interest rate on the new debt than you had on the old debts.

You may also get other more favorable loan terms like a lower monthly payment or a shorter or longer loan term. Taking this step also simplifies your bill paying. Rather than having several due dates and minimum payments to keep track of, you’ll have a single payment to the new lender.

Consumers can use this strategy to pay off credit card debt, student loan debt, medical debt, and any other consumer debt.

Reasons to Consolidate Debt

The primary function and benefit of debt consolidation is to save money on interest. Some debt, like credit card debt, can have interest rates in the teens and even higher, making it tough to dig your way out of debt. These loans typically have a much lower interest rate than do credit cards.

It also reduces the number of payments you have to keep track of each month, provides a fixed interest rate, improves your credit score, and can put much-needed cash in your hands.

How to Consolidate Debt

While personal loans are what most people think of when they think of ways to consolidate debt, they aren’t the only option.

Personal Loan

A personal loan is money borrowed from a lender. Personal loans can be used for a variety of needs, and usually start at a much lower interest rate than a credit card. These loans are typically for amounts between $1,000 to $100,000. They are unsecured loans; meaning they don’t require the borrower to provide collateral. Thanks to the internet, you no longer have to go through the arduous process of taking a personal loan from a bank. You can borrow the money online and often have the money as soon as the next business day.

Credible: This online loan marketplace connects borrowers and lenders. You can enter a few pieces of basic information and see offers from up to 11 lenders in just two minutes. You can borrow from $1,000 up to $100,000. Credible is so sure that you won’t find a better rate on a personal loan anywhere else that they offer the Credible Personal Loan Best Rate Guarantee. If you find and close a loan with a better rate elsewhere, Credible will give you $200 (terms apply, see the Credible website for details).

Balance Transfer Cards

A balance transfer credit card allows users to roll the balance of a high-interest credit card to a new card, which typically has a 0% APR introductory period ranging from 6-24 months. During that period, no interest accrues, allowing you to pay off the balance more quickly because all of your payments are going towards principle.

See top balance transfer credit card options.

Mortgage Refinance

Some homeowners may be able to do a cash-out refinance and use the money to pay off debt. A cash-out refinance means taking out a mortgage for more than is owed on the home and taking the difference in cash. The interest rates on a mortgage are typically much lower than the rates on credit cards.

Homeowners can also do a standard refinance to lower their interest rate, lower their monthly payment, or change the length of their mortgage.

Credible: This online loan marketplace will show you mortgage refinance options from up to 6 top lenders in just 3 minutes.

NMLS ID# 1681276 320 Blackwell St. Suite 200. Durham, North Carolina 27701

Home Equity Loan

A home equity loan lets homeowners borrow against the value of their home minus the amount of their outstanding mortgage. It can provide an infusion of cash and is easier to qualify for than some other types of loans because your home is used at collateral to secure the loan.

Figure: This company allows you to handle the entire process online. Approved borrowers can have their cash in as few as five days and offer loans up to $150,000.

Student Loan Refinance

Refinancing your student loans doesn’t put cash directly in your hands, but it can save you money. You take out a new loan at a lower interest rate, and the new lender uses the money to pay off the student loans you currently have. You make future payments to the new lender at your new interest rate.

Splash Financial: Answer a few questions, and you’ll receive new offers from up to three lenders in under 3 minutes with no impact on your credit score. You can choose fixed, or variable rate offers and term lengths of 5, 7, 8, 10, 12, 15, and 20 years.

Should I Consolidate My Debt?

Before you investigate your options, it’s a good idea to check your credit score, which you can do for free at Credit Sesame. Your credit score will be a big part of what determines the interest rate you’ll get on your loan.

Each lender uses its own formula, but generally, borrowers with scores of 720 or higher will get the best rates.

When Debt Consolidation is a Good Idea

If your credit score is high enough to qualify for a loan at a lower interest rate than you are currently paying on the debts you want to consolidate, it’s a great way to save money, potentially thousands of dollars.

When Debt Consolidation is a Bad Idea

If you use the money from your consolidation to pay off credit card debt and then start accumulating more debt once the cards have available room on the again, it won’t help you. In fact, it will put you even further into debt.

If your debt was caused by a spending problem rather than something like a job loss or a medical expense, and you don’t address the issue, debt consolidation will not be a solution.

Does Debt Consolidation Hurt Your Credit?

Most of the companies on this list allow you to search for loans without impacting your credit score. They do what is known as a soft credit check, which makes no difference as far as your credit score goes.

But once you take the next step and apply for the loan, the company will do a hard credit check, also known as a hard pull, and that does impact your credit score and will appear on your credit report as an inquiry. The number of inquiries you have is part of what makes up your credit score. This does lower your credit score slightly, typically about 5 points, which is really not that much.

But if you are using a loan to pay off credit card debt, the overall impact on your credit score will be positive. Having various types of credit improves your score, and if you take out a personal loan, for example, that is considered an installment loan. In contrast, credit cards are considered revolving credit.

When you pay off credit cards, it lowers your credit utilization ratio, one of the factors that make up your credit score. Credit utilization means how much of your available credit you’re currently using. A utilization under 30% is recommended. If you had a total credit limit across all credit cards of $1,000, for example, you wouldn’t want an outstanding balance of more than $300.

Is it Better to Pay Off Debt or Consolidate?

If you don’t have a tremendous amount of debt, and what that means will be subjective for everyone, consider if you could simply buckle down and pay the debt off without having to use a consolidation method.

Cut back on your spending and create a plan to tackle the debt strategically. If you can do that for a few months and kill your debt, you don’t need a consolidation loan.

Take Advantage of a Debt Consolidation Loan Today

In the past, if you needed a loan to consolidate debt you had to fill out lots of forms and provide tons of documentation. And then wait. And wait some more to find out if your application was approved and wait a little more before you had the money.

But thanks to a new generation of fintech companies, you can apply for a consolidation loan in about the same amount of time that it took you to read this article! Even better, you can shop around for the best rates. If you still had to get a loan the old fashioned way, you would probably take the first offer you got because you didn’t want to repeat the process with multiple lenders. And that meant you might not get the lowest interest rate or the best terms.

But today, you’re in control; you get to choose the best loan for you and your financial situation. If you are considering a debt consolidation loan, the time has never been better.