4 Min Read | December 30, 2022

What is Debt Consolidation and Why Should Millennials Care?

Debt consolidation can simplify your life and help you gain more control of your finances by consolidating some of your monthly bills into a single loan.

Debt Consolidation

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Millennials spend about a third of their monthly income repaying a mixture of debt—student loans, credit cards, mortgages, and more.

Consolidating some of this debt into a single loan could simplify personal finances, lower monthly payments, and help lead you out of debt.

Watch out for obstacles and pitfalls, though; debt consolidation only works for some people and some types of debt.

Here’s a startling number: American millennials spend about a third of their monthly income repaying debt, according to a report from a leading financial services company. 


So, if you’re a millennial, you’re probably juggling multiple debts, including these top five:1

  • Personal student loans (21% of millennials).
  • Credit cards (20%).
  • Mortgages (11%).
  • Loans for your family’s education (7%).
  • Car loans (6%).

No wonder you might be tempted to consolidate at least some of this debt into a single loan with a lower monthly payment. But what is debt consolidation, exactly, and could it really make your life easier?

What is Debt Consolidation?

Consolidating your debt usually means rolling up several credit card balances, outstanding loans, and other debts into a single personal loan. Because personal loans tend to carry lower interest rates and have longer repayment terms than some of your other debt, this restructuring can leave you with one, lower payment every month. But it’s not as simple as it sounds. 


Let’s run through the basics.

Why Consolidate Debt?

Lenders cite three primary reasons for debt consolidation:

  • Simplification. Simplify managing multiple debts—all with different interest rates, monthly payment levels, due dates, etc.—into a single payment each month.
  • Lower payments. Reduce your monthly payment, by lowering the interest rates you currently pay and extending your repayment terms, which gives you more breathing room to pay off your debt.
  • Better credit score. Improve your credit score in the long term, with a better mix of installment and revolving debt and a successful record of making your payments.2

Why Not Consolidate Debt?

Debt consolidation isn’t rocket science, but it isn’t simple, either. Among the arguments against consolidating your debt:

  • Only people with relatively good credit scores should even consider applying.
  • Only some debts, such as credit card balances, are good candidates for consolidation—but probably not secured debt, such as car loans or mortgages.
  • You might actually end up paying more money in the end due to longer repayment terms (plus fees).2

Who Can Apply?

The worse your financial situation is, the less likely it is that debt consolidation will solve your problem. If your credit score, debt-to-income ratio, or other facets of your financial profile aren’t up to snuff, banks could decline to lend to you. Or, any loan they write could come at such a high rate of interest that it doesn’t help your situation.

What Debt Can Be Consolidated?

Debt consolidation is usually used for unsecured debt (think: credit card debt, medical bills, personal loans, payday loans), rather than secured debt (think: home mortgages and auto loans, both of which tend to have lower interest rates than personal loans because they’re secured by your home and your car, respectively). 


Most student debt also carries lower interest rates, arguing against rolling it into a personal loan. However, you can sometimes simplify your finances by combining two mortgages into one, for instance, or rolling up multiple student loans into a single student loan.

When? After Ruling Out Some Practical Alternatives

Before pursuing debt consolidation, ask yourself if it’s really necessary. The Consumer Financial Protection Bureau recommends you first make a concerted effort to adjust your spending to the point where you can pay your current bills, and avoid taking out a new loan. You could also reach out to your creditors to negotiate better terms.3

Where? Banks, Fintechs, Balance Transfer Credit Cards

Debt consolidation loans, including personal loans and home equity loans, can be arranged primarily through banks or fintechs. An alternative is a 0% balance transfer credit card, if the balances you carry on your cards are actually your biggest headache. 


Another type of debt consolidation is available through debt relief companies, which will help you develop debt management plans and debt settlement plans that don’t involve loans. Instead, they renegotiate with creditors on your behalf to settle or change the terms of your existing debt.

How to Consolidate Debt?

If you’re considering debt consolidation, here’s a brief overview of how you could process:

  1. Determine if you’re a good candidate for a consolidation loan. Generally, you’ll want to be seen as creditworthy by the lender. Your credit score and debt-to-income ratio will likely be two deciding factors. Also consider how much debt you have. If you think you could actually pay it off within a year, maybe by making a few extra payments, consolidation may not be worth it.
  2. Decide which loans to consolidate, such as high interest loans, like private student loans or medical bills. If you’re not sure, it can help to talk to a non-profit credit counselor.4
  3. Choose the right consolidation option for you. For example, you may be able to consolidate into a personal loan or a home equity loan. But remember, a home equity loan uses your home as collateral – meaning if you can’t make payments, you could risk losing your house.
  4. Apply for the loan. Be sure you can pay the new monthly payments, and that terms are agreeable to your financial situation.
  5. Budget and make payments. Remember, when your debt is consolidated, it’s not paid off. It’s just restructured into simplified monthly payment. Keep a tight budget to make sure you don’t end up unable to pay it off.

What, Me Worry?

Consolidating your debt might be the best thing for you. If that’s the case, you should congratulate yourself for taking a big step to manage your personal finances. And yet, don’t lapse into a false sense of financial wellbeing, thinking that your debt is paid off. It’s not, it’s only restructured. 


If your spending remains above your means, consolidation could land you in a worse position. You could end up with a big monthly consolidated loan payment plus a growing number of new bills as you continue spending on your credit cards, store cards, and other accounts.

The 6 W’s of Debt Consolidation

What? Usually a matter of rolling up several debts into one bigger loan with a single, lower monthly payment.

Who? For people who are having trouble managing their debt, but who still have a relatively good financial profile.

When? You might give debt consolidation a try if you simply cannot adjust your spending enough to pay your current bills—or if you haven’t been able to negotiate new payment terms directly with your creditors.

Where? Banks, fintechs, and debt relief companies are the main sources.

Why? You could simplify your personal finance, make lower monthly payments, and improve your credit score.

Why Not? You could end up paying more in the long term.

The Takeaway

What is debt consolidation? Is it for you? You could simplify your life, gain more control of your finances, and start getting out of debt by consolidating some of your monthly bills into a single loan. But experts say to proceed with caution; debt consolidation isn’t the right fit for everyone.

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology, finance, and related public policy issues for more than 30 years.


All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

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