How to Consolidate Your Debts

1. Assemble your personal financial information: Before you can decide whether debt consolidation makes sense for you, you need to take a close look at all your consumer debt and/or student loan debt. As a first step, gather the most recent copies of your loan payments (including credit card bills). If you don’t have a copy of each payment, contact your lender or credit card company and ask it to mail or fax you a copy.
2. Document your debt: Once you’ve gathered your most recent statements, make a list or spreadsheet that shows the total remaining balance and the interest rate for each debt. If you have several credit cards with different rates, be sure to include a separate entry for each card.
3. Decide which debts to consolidate: Most consumer debtors choose to consolidate all their consumer debts at once, though you can choose to consolidate only some of those debts if you prefer. If you plan to consolidate only certain debts, it’s best to choose the ones with the highest interest rates.
4. Determine the total amount of debt that you plan to consolidate: Add up the amounts of the remaining balances on each of the debts that you plan to consolidate. For instance, if you have three credit cards with balances of $5,000 each, and a personal loan with a balance of $10,000, the total amount of the debt that you intend to consolidate is $25,000.
5. Find the average APR of the debts that you plan to consolidate: Find the average APR by adding up the interest rates of the debts you intend to consolidate and dividing by the number of debts. For instance, if you have three credit cards with APRs of 15%, 16%, and 17%, and one personal loan with an APR of 14%, your average APR is (15+16+17+14) ÷ 4, or 15.5%.
6. Choose a type of consolidation loan: If you have assets that can serve as collateral, such as a home or car, it’s generally best to get a secured consolidation loan. Get an unsecured loan only if you have no assets to serve as collateral.
7. Consult with lenders to decide whether debt consolidation will help you: Set up a few meetings with lenders (banks or credit unions) in your area to discuss your options in detail. If the lender can’t offer you a fixed loan with an APR lower than your current average APR, move on to another lender. (For more on choosing a lender, see “How to Choose a Consolidation Loan Lender” below.)
8. Apply for a consolidation loan: The loan application process requires you to complete various forms with your personal information, including your Social Security number. Some lenders charge a loan application fee, which should cost no more than $50.
9. Get approved (or rejected): If your application is approved, you’ll need to sign several loan documents to make your loan official. Review the terms of the loan closely to make sure none of the key points, such as the APR, have changed. If your application is rejected, you might want to consult a credit counseling service to determine why you were rejected and to help you design a plan to pay off your debt (see How to Use a Credit Counseling Service to Get Out of Debt).
10. Pay off your debts: Once you’ve signed the loan documents, the lender will issue you a loan check either right away or within a few days. Deposit that check into your checking account and use the money to pay off your debts in full. Don’t use it to make new purchases.
11. Pay off your loan: Most consolidation loans take 3–5 years to pay in full. Home equity loans and cash-out refinancings (explained below) can take between 15–30 years to pay off. The specific term of your loan will depend on the amount of your debt and the type of loan.

How to Choose a Consolidation Loan Lender

Banks

• National banks: National banks, such as Citibank, Wells Fargo, and Bank of America, have branches nationwide. They tend to offer the widest selection of consolidation loans at rates lower than those of regional banks but higher than those of internet banks. Their customer service may not be as personalized as that of a regional bank. In general, though, for most debtors national banks are considered the best choice because of their comparatively lower rates and wider selection of loans.
• Regional banks: These are “local” banks based in your city or region. They offer the most personalized service, though their rates tend to be the highest. If you want to work closely with a bank representative to guide you through the process, a regional bank is probably your best choice.
• Internet banks: Internet banks such as E-Loan (www.eloan.com) typically offer the lowest rates but don’t offer the personalized service of traditional banks. Despite the low rates offered by internet banks, their lack of in-person customer service makes them the least favorable choice for debtors seeking con­solidation loans.

Credit Unions

• You must first apply and become an approved member of a credit union to use its services.
• Credit unions are owned by their members, not by corporations.

Can Debtors Become Members of Credit Unions?

• A personal connection: Applicants can usually gain membership if they have a relative who is a member of the credit union.
• An employer connection: Applicants who work for employers with an existing relationship with the credit union can usually gain membership.
• Public service: Many credit unions offer less stringent membership policies for new members who are teachers, firefighters, police officers, self-employed, or small business owners.

Friends and Family Loans

• Formality: If a friend or relative gives you a loan, you may be tempted to use it for purposes other than paying down your debt. A bank or credit union will take over your debt and literally force you to use the loan for the appropriate purpose.
• Personal risk: The risk of getting a loan from someone you care about is more personal than financial. If you fail to pay them back or fail to handle their loan responsibly, you might also ruin the relationship.

Debt Consolidation Services