What is Bill Consolidation and How Does it Work? (2024)

By Kim Gallagher • February 19, 2021

Juggling multiple bills and debts every month can be tough. If you’re looking for a way to simplify your debt and possibly save money on interest, say hello to bill consolidation.

But what is the meaning of bill consolidation? And how can it benefit your situation and make things easier? As with any financial decision, you’ll want to evaluate all the pros and cons to take informed action. Here are some details to help you understand the definition of bill and debt consolidation and see if it’s right for you:

What does bill consolidation mean?

Also known as debt consolidation, you can define bill consolidation as a way to pay off multiple debts with a new personal loan. Credit card bills, loan payments, household bills and more (we’ve included a list below) are rolled into one simple payment.

For example: Let's say your debt from credit cards, installment loans, and medical bills totals $9,000. If you take out a bill consolidation loan for that amount, you can pay off your outstanding debt and only have the one loan to manage.

What is a bill consolidation loan?

With bill or debt consolidation, you take out one loan that pays off other debts. While the debt doesn’t go away, you might save money on interest if your new loan’s interest rate is lower than what you pay now.

What types of bills can be consolidated?
That dark cloud of unpaid debt that may be following you around probably includes common household bills. Consider consolidating the following bills:

• Credit, retail and department store cards.
• Home or auto repair bills
• Medical bills
• Utility bills (phone, electric, gas, cable, oil, etc.)
• Court judgments
• Income taxes
• Lines of credit
• Other installment loans

Certain banks, credit unions and loan companies may allow other kinds of debt, so if you have specific requests in mind, check with the lender before applying.

It’s also important to mention that some lenders may only offer bill consolidation for unsecured debt. Unsecured debt is any type of debt or loan that is not backed by collateral, such as a home or vehicle. To get a deeper understanding of the two, check out the difference between a secured and unsecured loan.

When you consolidate your existing debts, your total finance charges over the life of the new loan may be higher than for your current debts, because your interest rate may be higher and/or your loan term may be longer.

Why should I consolidate my bills?

The advantages of bill consolidation vary from person to person. Some popular benefits, however, include:

• Fixed interest rate — Your interest rate will stay the same from your first payment to your last. This also means your amount due will be the same every month.

• Lower interest rate — Your bill consolidation or debt consolidation loan may be at a lower interest rate than what you’re paying now for your outstanding debts. That could save you some serious money.

• One monthly payment — Instead of managing multiple accounts and due dates, you can save time with one payment due date for one account. Nice and simple.

• An improved credit score — With only one payment date to remember each month, you are more likely to make on-time payments once you’ve rolled multiple bills into one. Over time, that could boost your credit score. What’s more, debt consolidation improves your credit-utilization ratio, which makes up 30% of your credit score.¹

• Fixed loan term — Whether the repayment term of your new loan is three years or five years, you’ll know exactly what day your loan will be paid in full. Mark that happy day on your calendar!

• Less juggling, less stress — By simplifying things, you may stress less about multiple due dates, having enough money in your account, missing payments and accumulating late fees. You could buy a little sanity.

• Getting out of debt — We saved the best reason for last. Bill consolidation can be an effective way to become debt-free and financially healthy. For more tips and strategies, spend some time with our free online resources that talk about debt consolidation, setting financial goals and lowering monthly expenses.

How does a bill consolidation loan work?

Here’s a quick breakdown:

1. Apply for a bill consolidation loan — Like most other installment loans, lenders will require personal and financial information. Get these documents ready to speed up the process: proof of identity, proof of residence and proof of income.

2. Receive your funds — If your application gets approved, the funds will be processed and delivered according to your lender (payment times vary by lender). At OneMain, you may be able to receive your funds as soon as the same day if you use a bank-issued debit card.²

3. Pay off your debts — Once your funds become available, you or your new lender will send your creditors the funds needed to pay off the debts you selected.

4. Start paying the bill consolidation loan — Payment will likely begin the month after receiving your funds. Be sure to make your payments on time and in full to avoid late fees, additional interest, or other costly penalties.

Now that you know the meaning of bill consolidation, you see that it’s pretty straightforward: You use a single personal loan to pay off multiple bills. Taking out a new loan is a big decision. But if it can help simplify your monthly payments, save money on interest, improve your credit score and reduce stress, it may be a good solution for your situation.

1. MyFICO.com. https://www.myfico.com/credit-education/whats-in-your-credit-score
2. Funding Options; Availability of Funds: Loan proceeds may be disbursed by check or electronically deposited to the borrower’s bank account through the Automated Clearing House (ACH) or debit card (SpeedFunds) networks. ACH funds are available approximately 1 to 2 business days after the loan closing date. Funds through SpeedFunds can be accessed on the loan closing date by using a bank-issued debit card.

This article has been updated from its original posting on Sept. 10, 2019. Matt Diehl contributed to this article.