How Does Debt Consolidation Work?

Debt consolidation is a debt management solution that can help you pay down or eliminate your debt. It involves combining debt from multiple sources—like across multiple high-interest credit cards or loans, for example—into a single loan or line of credit.

Consolidation does not automatically erase your debt. Instead, it unlocks new ways to repay what you owe more effectively, including streamlined monthly payments and reduced total interest.

If personal debt is starting to weigh you down, debt consolidation is a simple and effective way to manage your finances.

Essentially, you can pay off all or part of your existing debt with a new financial solution that offers better terms, namely a fixed interest rate, a single monthly payment, and a longer repayment period, if preferred. Two popular ways to consolidate debt include a personal loan or a balance transfer credit card.

Here’s how it works.

In this scenario, if you continued to make payments on your existing debt, you would need to pay $2,859 a month for three years to eliminate it. You would also pay $27,938 in interest during that time.

But if you secured a personal debt consolidation loan with a lower fixed interest rate of 17%, you would save $6,382 in interest over the course of the loan.

If your immediate focus is on the cost of your monthly payments, you may consider extending your repayment period. In the same example, consolidating your debt into a 10-year loan will decrease your monthly payment from $2,859 to $1,314. This is 54% less per month than your previous financing.

Keep in mind, however, that extending your repayment term will result in paying more total interest over the life of the loan.

There are several ways to consolidate debt. Here are some common options:

1. Personal loan for debt consolidation: A debt consolidation loan, like the one offered by BHG Financial, can be a wise choice if you qualify for a low interest rate and want to consolidate multiple types of unsecured debt. These loans do not require collateral, offer a fixed interest rate, and have a set repayment term, which can provide predictable monthly payments.
2. Balance transfer credit cards: These cards often come with zero interest or a very low introductory annual percentage rate (APR). This can be a good option for consolidating high-interest credit card debt if you can pay the entire balance before the promotional period ends. However, there are balance transfer fees to consider, and you could accumulate even more interest than what you started with if you can’t pay your balance in full before the introductory APR expires.
3. Home equity loan: Borrowers with significant home equity who are comfortable using their home as collateral for a loan can consider a home equity loan. Just like a personal loan, you’ll receive a lump sum that you’ll pay back with a fixed interest rate. However, you’ll need to have a substantial amount of equity in your home to qualify, and a home appraisal is typically required.
4. Home equity line of credit (HELOC): These loans are most similar to credit cards, allowing you to draw from a credit line as needed. However, the interest rate is variable, meaning it can fluctuate at any time and make budgeting unpredictable. This is also a secured loan, which means you can lose your home if you default.

FYI: BHG Financial offers debt consolidation loans with fixed interest rates and low monthly payments, allowing you to spend less time managing debt and more time focusing on other priorities.

The impact of debt consolidation on your credit can vary. In the short term, taking out a new loan or line of credit may temporarily lower your credit score due to a new credit inquiry and the addition of a new account. However, in the long run, debt consolidation can potentially improve your credit score by:

• Lowering credit utilization: Consolidating revolving credit debt (such as credit card debt) through an installment credit (such as a debt consolidation loan) decreases your credit utilization ratio, which is a significant factor in credit scoring.
• Simplifying payments: Making consistent, on-time payments on your new consolidation loan can help establish a positive payment history, which can improve your credit score.

Responsible management of your finances after consolidation is key to ensuring a positive impact on your credit score. It remains your responsibility to keep track of payment due dates on your consolidation loan, as any late or missed payments will result in a dip. Consolidating to one monthly payment makes it easier to handle your payments.

BHG Financial understands the stress of managing multiple types of debt and selecting the right solution for your financing needs. That’s why we offer personal loans specifically designed for borrowers to consolidate large amounts of existing debt.

• Higher loan amounts: Most lenders offer personal loans between $1,000 and $100,000, but BHG can fund larger loan amounts up to $250,000.¹
• Flexible repayment terms: We work with you to establish repayment terms that fit your budget and help keep payments manageable. BHG personal loans come with extended repayment terms of up to 10 years.^1,2
• Streamlined application process: Our application process is designed to be efficient, so you can get the funds you need quickly. You can get your offers online in minutes. This will not impact your credit score.³

FYI: BHG’s concierge loan service and tailored loan options have earned us more than 3,400 5-star reviews on Trustpilot.

Is BHG a good option for professionals looking to consolidate high-interest debt?

Consolidating your personal high-interest debt with BHG Financial’s personal loan can provide you with a fixed interest rate and a predictable, low monthly payment, saving you money in the long run. High-interest debt like credit cards tends to have higher annual percentage rates (APRs) than personal loans. Plus, credit card APRs are variable, meaning they change according to market conditions. These factors can significantly impact your budget.

How fast can I get funding with BHG for debt consolidation?

When you apply for a loan with BHG, you can get an approval decision within 24 hours.⁴ If approved, you will receive your funds in a single lump sum within as few as five days.⁴

Does BHG offer fixed or variable rates for debt consolidation?

BHG’s personal loans for debt consolidation have fixed interest rates, meaning that your monthly payments will remain the same throughout the repayment period.

What credit score is needed to qualify for a BHG debt consolidation loan?

Most borrowers who get a debt consolidation loan with BHG have a minimum FICO score of 640. When determining eligibility, BHG considers your income in addition to your credit score.

Ready to see what’s possible? Use our quick and easy payment estimator to get your personalized loan estimate in just seconds.

Are there fees for debt consolidation loans?

Some lenders may charge an origination fee for a debt consolidation loan, which is typically deducted from the loan amount. Other potential fees for personal loans could include late fees.

Can I still use my credit cards after consolidating?

Yes, you can still use your credit cards if you consolidate them. Consolidation will pay off the cards, so your balances are at zero; it won't close them. That said, it’s generally recommended to avoid running up those balances again so you don’t accumulate more debt.

How long does it take to pay off consolidated debt?

The timeline for debt consolidation can vary based on the type of consolidation solution you choose and the lender’s process. Applying for a personal loan can be done relatively quickly, and funding can occur within a few days. Balance transfers can be processed within a few weeks. Debt consolidation with a new loan also depends on the terms you choose. Typical repayment terms range from one to 10 years.

Can I consolidate debt with bad credit?

Yes, it’s possible to consolidate debt with bad credit, but your terms may be less effective at saving you time or money. Applicants with bad credit are more likely to be approved for debt consolidation loans with higher rates, lower loan amounts, and fees. Not all lenders are willing to work with borrowers with lower credit scores. Specialty lenders may take on higher-risk borrowers.

If you need to consolidate debt, contact a BHG advisor today or use our quick and easy payment estimator to get your personalized loan estimate in just seconds.