Consolidating debt - When should you do it?

What is debt consolidation?

When you consolidate debt, you make a new loan contract with different terms. Here are some examples:

You change who you loan money from. In other words, you sell your debt to someone that offers better terms
Smart if you get better terms. Remember that your debt is valuable for the banks. They make money on your debt!
Du negotiate better terms with your current lender
Did you get more income or better credit score? Maybe you also can get a lower interest if you talk yo your lender?
You combine multiple loans into a single loan
Smart if you have many different loans and easily lose track of the payments
You split a single loan into multiple loans
Smart if you want to split the debt with someone else
You change the duration for the loan
Smart if you want to adjust the size of the monthly payments. Keep in mind this usually increase the total cost as well.

Start by finding out how much you owe, and to whom: How to find my debt?

You should consider consolidating your debt if:

You have multiple loans that make it a chore to pay each month
A single bill for all your debt will make it easier for you. It also reduces the chance you forget to pay
You have high interests on one or many of your loans
You can save a lot by combining many small loans to a single big one with lower interest
You have one or many loans that was transferred to debt collectors
Companies that do debt consolidation can also often help you clean up after your debt went to debt collectors.
You got a raise or better credit score
This gives your lender better security, which in turn can give you a lower interest
You can combine many expensive loans to a single cheaper loan
Even with no security, you can often get better terms on a collected loan. Its even better if you can use something as security though, for example a house.

It's not a given that consolidating your debt makes it better for you.

Here are some tips to what you should look out for:

Watch the loan duration
Even if you get a lower interest, the total sum can be higher if the duration is longer. A common example is when you combine your car loan with your mortgage, which is rarely a good idea.
Watch fees when establishing or terminating loans
Fees can add to the consolidation cost
Don't consolidate debt only to get more money to spend now
Always have a plan for paying down expensive debt as fast as possible. You should pay as much as you can afford.

You can compare the total cost of all types of debt in our calculator!