The nonhousing debt in the U.S. has grown every year since 2013. From auto loan debt to credit cards, Americans are leaning more on borrowed money to manage finances.
In the second quarter of 2023, nonmortgage debt in America grew to $4.71 trillion, a 5.8% increase from $4.45 trillion at the same time last year. Although delinquency rates on that debt have remained low, payments could become a larger burden as interest rates and the cost of living rise.
Managing that debt can be a challenge, but one tool Americans take advantage of are debt consolidation loans. Consolidating debt can allow borrowers to combine balances and reduce interest rates to make payments more affordable.
To better understand how debt is being managed, Forbes Advisor undertook an in-depth analysis of U.S. debt and loan consolidation.
Debt Consolidation Loan Statistics at a Glance
Debt consolidation loans are a common tool to repay debt, but they don’t always pave the way to debt freedom. In September 2023, Forbes Advisor surveyed 1,000 individuals who have used personal loans for debt consolidation to find how much they consolidated, why they chose to consolidate and how it’s affecting their debt outlook. The key findings include:
- The typical debt consolidation loan amount was between $10,000 and $20,000.
- The majority of respondents (59%) successfully consolidated all of their existing debt using a debt consolidation loan.
- Among those who used a debt consolidation loan, medical bills constituted 50% of their debt.
- Only 4% of respondents believed they would remain debt-free after paying off their debt consolidation loan.
- Eighteen percent of respondents anticipated falling back into debt less than six months after fully paying off their debt consolidation loans.
When Do People Get a Debt Consolidation Loan?
A debt consolidation loan simplifies repayment by combining multiple debts into one unsecured installment loan. These loans can also offer a lower interest rate and reduced monthly payments compared to the original debts.
Consolidation loans can be useful for high-interest revolving debt, such as credit cards, since they offer a fixed monthly payment with a preset loan term. This can help motivate borrowers to repay their debt, instead of just just making minimum payments on credit cards.
Forbes Advisor’s 2023 debt consolidation trends survey showed that 54% of respondents used a personal loan for debt consolidation to simplify and reduce their monthly payments, 42% to lower their interest rates and 35% to reduce their overall debt burden.
Our survey also found that 59% of respondents managed to consolidate all their existing debts through one loan, while 30% reported that the loan did not cover all of their debts.
How Do Debt Consolidation Loans Impact Americans’ Relationships With Debt?
In the last ten years, nonmortgage debt has increased by over 50%, indicating that consumer debt—like credit cards, auto loans and student loans—is becoming increasingly entrenched in the lives of many Americans.
Getting rid of debt is also an obstacle. Only 4% of respondents who consolidated their debt believed they’d remain debt-free after paying off a debt consolidation loan.
The Debt Dilemma
Of those surveyed, 81% felt very or somewhat confident in their financial literacy, yet accumulating debt may be unavoidable even with that knowledge.
Asked about current debts, 70% of respondents reported having over $20,000 in nonmortgage debt. Medical bills, credit card bills, house renovations and vehicle debt were all the primary sources of debt.
How Americans Are Utilizing Debt Consolidation Loans To Manage Debt
Debt consolidation loans can be used for a wide range of purposes. A majority of respondents used their loan to simplify and reduce payments, while others took advantage of debt consolidation loans to lower interest rates, alleviate overall debt, lower monthly payments and improve credit scores.
Loan size also varied, with 47% borrowing between $10,000 and $20,000 for debt consolidation and another 32% borrowing more than $20,000 for a debt consolidation loan. About 59% successfully consolidated all their existing debt with a personal loan, but 30% were approved for debt consolidation loans that covered just a portion of their debt.
Among those who couldn’t fully consolidate their debt balances with one loan, 57% left the remaining debt as is, and 19% sought out additional loans to consolidate balances.
Debt Consolidation Repayment
When borrowers took out a debt consolidation loan, 66% were confident in their ability to repay it without issues, while 28% anticipated payment difficulties.
Despite most borrowers being confident about managing their debt, 45% stated they had missed a payment on their consolidation loan, as opposed to 46% who always made payments on time.
Throughout repayment, debt took up a large chunk of the respondents’ income. Two in five said they allocated 21% to 30% of their income to debt. Meanwhile, nearly one-third reported dedicating 31% or more of their earnings toward debt repayment.
Can Debt Consolidation Lead To Debt Freedom?
Although debt consolidation loans can come with the appeal of debt freedom, most respondents didn’t think it would last.
The majority of borrowers believed that they would accumulate debt again after repaying their debt consolidation loan, with 35% expecting to fall back into debt within six months to one year, 26% within one to two years and 18% within less than six months.
Yet, respondents still had plans to stay debt-free. Long-term financial planning, used by 71% of respondents, was among the most favored approaches to avoid future debt, along with cutting unnecessary expenses, establishing an emergency fund and improving spending habits.
When asked about their financial goals if they were to achieve debt freedom, 71% of respondents expressed a desire to save for the future, 60% expressed a wish to become homeowners, 57% expressed an aspiration for financial peace of mind and 46% expressed a goal of starting a business.
Debt Statistics in the U.S.
Debt consolidation loans are just one piece in a much bigger picture of debt in the U.S. As debt has grown, different groups have accumulated varying levels of it.
Average Debt by Age
Among all age groups, individuals aged 40 to 49 carried the highest average nonmortgage debt per capita, with an average of $27,838. Following closely behind are those aged 30 to 39 who had average debts of $26,532.
Average Debt by Gender
Women and men owed similar average amounts in credit card debt: $6,232 for women and $6,357 for men. In terms of mortgage debt, women had an average of $192,368, which is $18,666 less than men, who carried an average mortgage debt of $211,034.
On average, men had more debt than women, including:
- 18% more personal loan debt
- 15% more auto loan debt
- 9% more mortgage debt
- 2% more credit card debt
Average Median Value of Debt by Race and Debt Type
Below are debt balances Americans carry by race.
Sources of Debt
In a separate survey from October 2023, Forbes Advisor surveyed 1,000 individuals who had used a personal loan. Borrowers reported needing a personal loan for a wide range of reasons, including:
- Monthly living expenses. 23%
- Debt consolidation. 17%
- Home improvement. 17%
- Financing a vehicle. 13%
- Auto repairs. 9%
- Medical bills. 7%
- Education expenses. 5%
Average Personal Loan Interest Rates Over the Years
Personal loans are often used to consolidate debt. Over the past year, personal loan interest rates have increased by 31%, from 8.73% in Q2 2022 to 11.48% in Q2 2023. This ultimately increases the cost of borrowing money.
Here’s how personal loan rates have changed in the past five years:
Debt Consolidation and Credit Scores
Debt consolidation can impact credit scores both positively and negatively. Before using a debt consolidation loan, consider what it can do to your credit.
1. It Can Add Hard Inquiries to Your Credit Report
Creditors typically perform a hard credit inquiry when you apply for a consolidation loan, which can lower your score temporarily. Credit inquiries impact your credit score for up to a year and then drop off your credit report within two years, according to Experian.
2. It May Lower Your Credit Utilization
Credit utilization has a significant weight on your FICO Score and is a percentage that shows how much of your revolving credit you’re using. Moving balances from a credit card to an installment loan can lower your credit utilization, which can boost your credit.
3. It Could Shorten Your Credit History Length
The length of your credit history accounts for 15% of your FICO Score. The longer your credit history, the better. However, taking out a debt consolidation loan would open a new account, which may lower the average age of your accounts and shorten the length of your credit history.
4. It Could Improve Your Payment History
If consolidating debt helps you make timely payments, this can enhance your credit score over time since payment history constitutes 35% of your credit score. However, making late payments on a loan will likely cause your score to drop.
5. It Could Tempt You to Close Accounts
Closing old accounts can be tempting when you pay off old debt with a new loan. However, closing credit cards can lower your available credit limits and increase your credit utilization ratio if you have balances on other cards. Consider keeping old accounts open after consolidation to maintain a low credit utilization.
Is Debt Consolidation a Good Idea?
Consolidating debt can simplify payments and reduce interest rates on high-interest loans or credit lines. Whether it’s best for your situation depends on various factors, including your debt, credit history and financial goals.
Qualifying for a debt consolidation loan with low interest rates can be a challenge. Typically, a strong credit score of at least 670 may be necessary to qualify for the lowest rates on the best debt consolidation loans.
Some lenders offer consolidation loans for bad credit, but interest rates on these loans may be high. If you also have a large amount of debt to consolidate, you could end up with an unmanageable monthly payment.
A longer loan term could give you lower monthly payments, but that can mean you’ll pay more in interest. On the other hand, shorter loan terms will save you money on interest but have higher monthly payments.
Using a debt consolidation calculator can help you estimate monthly payments and total loan costs for different consolidation options. Shop around with different lenders to find the best rates and terms you can qualify for on a debt consolidation loan.
Lastly, consider addressing the problems that led to your debt before consolidation. If, for instance, you consolidate credit card debt, your balances will be $0, allowing you to spend up to your credit limit. Falling into old credit usage habits after consolidating can lead to even more debt and more financial issues down the line.
A debt consolidation loan can be a great tool to repay debt, but it does have its drawbacks. Before accepting one of these loans, consider the pros and cons.
Pros of Debt Consolidation
- Streamlines payments. By combining multiple debts into one loan, it can be easier to track when payments are due and how much you owe.
- Quicker payoff. Debt consolidation can be a tool to get rid of your debt sooner if you select a shorter loan term than your original debt or make extra payments.
- Lower interest rates. Since revolving debt like credit cards carry high interest rates, a debt consolidation loan can allow you to repay your debt at lower rates.
- Reduce monthly payments. A lower interest rate or longer loan term can make your monthly payments smaller and more manageable.
- Improve credit. Reducing your credit utilization rate and adding a track record of steady payments to your credit history can improve your score.
Cons of Debt Consolidation
- Upfront costs. Getting a debt consolidation loan can come with other costs, such as origination fees.
- Increase interest rates. Depending on the debt you’re consolidating and the rates you qualify for, a debt consolidation loan may have higher interest rates than your original debt.
- Higher cost. If you opt for a longer loan term, you could land smaller payments but an increase in interest costs over the life of the loan.
- Damage credit. If you miss payments on your loan, your credit score could be negatively affected.
- Doesn’t solve underlying problems. Although a debt consolidation loan can help you get out of debt, it doesn’t address the issues that led to your debt.
Alternatives to Debt Consolidation
A debt consolidation loan is just one of many ways to manage debt. Below are other strategies and resources borrowers can use to make payments more manageable.
Credit Counseling
If you can no longer handle your debt alone, nonprofit credit counseling agencies, such as the National Foundation for Credit Counseling, offer one-on-one services that can help you create a household budget and debt payoff plan. For borrowers considering bankruptcy, counselors can also explain the process and discuss the benefits and risks before filing.
Debt Management Plan
A debt management plan (DMP) is a service offered by some credit counseling agencies that manage your debt repayment for a small fee. First, a counselor helps you create a budget and tries to negotiate a reduction of your interest rate and fees with creditors.
From there, you make one payment to the counseling agency, and that payment gets distributed to your creditors until your debt is repaid. A DMP is a way to consolidate your payments without taking out a new loan.
Payment Arrangements
If you have trouble paying debt, some creditors may offer an arrangement or hardship plan that pauses payments temporarily or reduces your interest rate and fees. This payment relief could help you avoid falling behind on bills during a financial emergency.
Debt Settlement
A debt settlement is when a creditor settles a debt for less than what the borrower owes. This is most often an option when an account is severely delinquent and it allows borrowers to negotiate their own settlements or hire a settlement company to broker a deal for a fee.
However, a settlement can have a negative impact on credit, and discharged debt may be taxable, so speak with an accountant about the implications before negotiating a settlement for a large debt balance.
Bankruptcy
When borrowers are insolvent, dealing with collection calls and on the brink of repossessions or wage garnishments, bankruptcy may be worth consideration. There are two types of bankruptcy: Chapter 7 is a full discharge of unsecured debts, such as credit cards and medical bills, while Chapter 13 reorganizes your debt under a more manageable payment arrangement.
A bankruptcy attorney or credit counselor can explain the filing process and provide insight on whether it makes sense for your situation.
Survey Methodologies
The online survey of 1,000 American adults who have ever used a personal loan for debt consolidation was commissioned by Forbes and conducted by market research company OnePoll, in accordance with the Market Research Society’s code of conduct. Data was collected from Sept. 6 to Sept. 11, 2023. The margin of error is +/- 3.1 points with 95% confidence. This survey was overseen by the OnePoll research team, which is a member of the MRS and has corporate membership with the American Association for Public Opinion Research (AAPOR).
The online survey of 1,000 Americans who have applied for a personal loan in the past was commissioned by Forbes Advisor and conducted by market research company OnePoll, in accordance with the Market Research Society’s code of conduct. Data was collected from Oct. 10 to Oct. 18, 2023. The margin of error is +/- 3.1 points with 95% confidence. This survey was overseen by the OnePoll research team, which is a member of the MRS and has corporate membership with the American Association for Public Opinion Research (AAPOR).
More From Advisor
- Best Personal Loans For LASIK Financing Of October 2023
- Best Kitchen Remodel Loans Of October 2023
- Today’s Personal Loan Rates: October 23, 2023—Rates Move Lower Once Again
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
