According to Merriam-Webster, the definition of the verb consolidate is to “join together into one whole” or to unite. In the debt world this means bringing multiple miscellaneous debts under the same umbrella, so to speak. The goal is to make it easier to keep track of debts and pay them off, shorten the repayment timeline on said debts and reduce the amount of interest you ultimately pay when doing so.
Using a debt consolidation loan to streamline other numerous debts is perhaps the most popular method here. Most, if not all, consumers would admit that being responsible for one monthly loan payment is simpler than trying to juggle various other debts — and that it’s preferable to pay less interest than more, of course.
But not every debt under the sun is eligible for the consolidation process, nor would it make a whole lot of sense to consolidate certain types of debts based on their interest rates. Keep reading to learn more about what it’s often possible to include in a debt consolidation as well as what types of balances are typically excluded from this process.
Types of Debt You Can Consolidate
The types of debts most eligible for consolidation are unsecured — or not tied to physical assets that the lender could repossess in the event of default.
This makes the following debt types solid candidates for consolidation in many cases:
- Credit cards: It often makes sense to consolidate high-interest, revolving credit card accounts because they tend to be one of the most expensive types of debts to carry over time. This is particularly true for cardholders paying the minimum amount due each month, as doing so usually extends the lifespan of the credit card balance by years and tacks hundreds if not thousands of extra dollars onto the price tag.
- Private student loans: Whether or not it makes sense to consolidate student loans usually depends on the type — federal vs. private — as well as their interest rate.
- High-interest personal loans: Say you took out a personal loan in the past when you had worse credit, but you’re now able to qualify for a more competitive interest rate. It could make sense in cases like these to take on new debt to pay off the old debt for less. Similarly, if you took out a payday loan in the past and now are able to secure a loan at a lower interest rate, it almost certainly makes sense to include this in the bundle.
- Medical bills: If your medical bills have gone to collections and there’s no way to negotiate with your provider, it may make sense to seek out a more reasonable interest rate via consolidation.
Notice we said “in many cases.” This is because there’s no one-size-fits-all rule determining if it’s a smart idea to consolidate certain debts. Much of the outcome rests on whether or not you can qualify for a debt consolidation loan at an interest rate lower than your current debts.
Types of Debt You Cannot Consolidate
On the flip side, secured debts that are backed by collateral are usually ineligible for consolidation, with the two biggest examples being mortgages and auto loans. However, it also doesn’t make much sense to consider consolidating these as they tend to carry low interest rates as is. For instance, it wouldn’t make sense to consolidate an auto loan on a used car at 9 percent APR if you’d only be able to qualify for a consolidation loan at 12 percent APR.
A good rule of thumb to remember: You can usually include unsecured debts with high interest rates in the debt consolidation process.