What types of debt should you (and shouldn't you) consolidate?

Better financial health is not a pipe dream—it's achievable with a plan. Debt solutions may be part of your plan if you owe money on credit cards or loans.

Debt consolidation could make your situation more manageable and give you a clear path forward to pay it off. You could use a personal loan or home equity loan to pay off what you owe, so that you have just the loan payment to make each month. If you can also lower your interest rate, you may even make your debt more affordable.

You might wonder what types of debt you should consolidate, or whether there are certain debts you shouldn't consolidate. We'll help you compare different types of debt to decide which ones to combine.

What types of debt are best to consolidate?

The best debts to consolidate are the ones that cost you the most money in interest or put a serious strain on your budget. Credit cards, personal loans, and medical bills are often good candidates for debt consolidation, particularly when they have high interest rates. Bills that have gone to collections may also qualify for consolidation. 

Here's a more exhaustive list of debts you could consolidate:

• Retail store charges

• Personal credit card debt

• Personal loans and lines of credit

• Hospital and doctors' bills

• Dentist bills

• Veterinary bills

Can debt consolidation save you money? 

It's possible to save money with consolidation if your new loan has a lower interest rate. This is common when consolidating high-interest debt like credit cards with a lower-interest personal or home equity loan. In some cases, consolidation could let you pay off your debt faster, too.

Here's an example of what you might save. Say you owe $20,000 to five different credit cards with an average APR of 21.99%. You pay them off with a five-year consolidation loan at 12.99%.

Debts you may want to keep separate

Some debts aren't worth consolidating if there's nothing to gain. For example, it might not make sense to consolidate if you wouldn't save any interest or you'd lose certain benefits. 

Think twice about consolidating these debts:

• Federal student loans

• Low-interest auto loans

• Mortgages

• Monthly household bills, like utilities, subscriptions, or rent

With federal student loans, you risk the loss of certain protections and benefits if you consolidate with a private lender. For example, you give up deferment and forbearance periods, access to income-driven repayment plans, and a chance at loan forgiveness. 

It's not common to consolidate a mortgage loan. You might refinance a mortgage to change your loan terms, but that isn't the same as consolidation. You don't combine multiple debts—instead, you replace your current home loan with a new one. 

Can you consolidate secured and unsecured debt?

How you consolidate debt could depend on whether you owe secured or unsecured debts. Here's what that means.

• Secured debts are backed by collateral, which is something of value that you own. That could be your home, a vehicle, a bank account, or some other asset.

• Unsecured debt isn't attached to any collateral. Credit cards, personal loans, and medical bills are examples of unsecured debts. 

When you consolidate secured and unsecured debt into a single loan, you tie your collateral to both types of debt. For example, you might use a home equity loan for debt consolidation to pay off unsecured credit cards or personal loans. Because the home equity loan is tied to your home, those unsecured debts now become secured. 

That could be risky, since secured debts have a catch. If you don't pay them off, your lender could take your collateral. In the case of a home equity loan, that means you could lose your home if you don't make your payments. 

If you're focused on credit card debt consolidation or medical debt consolidation, think about whether it makes sense to use a secured loan to pay it off. 

Here's a recap of how secured and unsecured debts compare. 

When mixing secured and unsecured debt could make sense

Is debt consolidation a good idea when you have different types of debt? It could be a good choice if it works to your advantage in some way. 

For example, you might consolidate secured and unsecured debt if you:

• Qualify for a significantly lower interest rate on a debt consolidation loan

• Can lower your monthly debt payments, while reducing the number of payments you have to make

• Feel confident that you can make all the payments required under the terms of a secured loan

Comparing rates and terms for secured and unsecured consolidation loan options could give you an idea of what you might pay. That could help you decide where either type of loan might fit into your budget. 

When consolidating secured and unsecured debt might backfire

There are three main risks to be aware of when you combine secured and unsecured debts:

• Loss of collateral. If you can't repay a secured loan, your lender could keep your collateral. In a worst-case scenario, nonpayment could cost you your car or home. 

• Extended repayment. Secured loans for debt consolidation (like home equity loans) typically have longer terms. You might take 10 to 15 years to pay off the debt, which could be a drain mentally and on your budget. 

• Higher interest. Secured loans might offer lower interest rates, but you could pay more interest overall. The longer your loan term, the more interest you pay to the lender overall. 

Add up the pros and cons of debt consolidation for your specific situation. For example, if you could save thousands on interest, that's a pro. But if your budget would be strained by the monthly payment required for a consolidation loan, that's a con. Look at how the pros outweigh the cons—or vice versa—to decide if consolidation is the right choice for you.

What's next

Consolidation could lighten your load mentally and financially if it allows you to get a better handle on your debt. Knowing which types of debt to consolidate and which ones to avoid could help you choose the best loan option for your needs.

Once you decide on a loan, you can continue your debt payoff journey with confidence. And if you're hesitant to borrow, learn five ways to consolidate debt without a loan.