Debt consolidation

Debt is a reality of life for most Americans. Debt interest from credit cards, along with student loan payments, auto loans, and mortgage payments, leads many Americans to a difficult situation, in which. debt consolidation is worth considering.

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What is debt consolidation?

Debt consolidation refers to debt consolidation loans, which are often delivered alongside other financial services. That means taking a new, large loan which you use to pay off all your other loans immediately.

Having several debts combined into a single debt achieves several favorable outcomes:

  • Simpler management of your debt repayment process
  • Favorable payoff terms
  • Lower monthly payments
  • A better interest rate
  • A possible path to saving your credit score

Debt consolidation is a process that typically begins with a free consultation. You discuss your financial challenges with a financial professional, who will walk you through your options. Their services will normally end with a loan, but they will first try to negotiate more favorable terms with your creditors.

Creditors are normally happy to work with debt consolidation companies. That’s because debt consolidation means that they can maximize their possibility of collecting the money you owe them.

Debt consolidation loans require you to go through a loan application process. Your qualification, interest rates, and terms will depend on your credit history and other factors.

Key Takeaways

Debt consolidation is a process that consolidates and simplifies your repayment process. You use one loan to pay off your debts with a simpler and more affordable process.

How does Debt Consolidation Work?

Debt consolidation starts with choosing a debt consolidation company to work with. You can compare different debt consolidation companies on Lendstart. Compare different companies for:

  • Upfront costs
  • Professional certifications
  • Online reviews
  • Interest rates
  • Loan terms 
  • Fees and penalties

After you’ve chosen a debt consolidation company, you will normally go through an initial consultation. A financial professional will look over your situation and make recommendations. If your total debt balance is high, they will offer you a debt consolidation loan. 

After you go through the loan application process, you will consolidate your debts and start paying back your new loan. You will make regular repayments towards a single loan. Your interest rate will normally be higher than the total interest you were paying before taking your debt consolidation loan. But debt consolidation loans still come with interest that you must pay back over the agreed term.

Once that loan is paid off, the debt consolidation process is complete. From there, you return to handling your finances. You are still responsible for your debt, so it’s recommended that you do your best to avoid a similar financial situation going forward.

What Types of Debt Consolidation Exist?

There is more than one approach to debt consolidation. Here are the major categories you’ll find if you’re searching for help with your debt.

Debt Consolidation Loans

There are several types of debt consolidation. The simplest way is through a debt consolidation loan. You simply take a loan to pay for all your current loans. These are normally unsecured personal loans with moderate to high interest rates, depending on your credit history.

Debt Consolidation Programs

Debt consolidation programs often include additional steps which are alternatives to a loan. These programs, also known as debt management plans, are newly arranged payment schedules and terms. Debt consolidation companies try to negotiate more favorable terms that make it easier for you to repay. In some cases, these programs will still lead to a debt consolidation loan.

HELOC For Debt Consolidation

A home equity line of credit (HELOC) is a more affordable way to finance debt consolidation. You can normally borrow up to 80% of your home’s equity to consolidate your other loans. A HELOC functions similarly to a credit card, as you can draw money when you need it. Your rates will normally be better, however. But you must also consider the risks of securing a loan with your home’s equity.

Consolidate Credit Card Debt

You can use a new, promotional credit card deal to transfer your credit card balance to a new card. Combining your debt under a new card with a lower interest rate can save you on interest.

Pros and Cons of Debt Consolidation

Here are the most important pros and cons of debt consolidation.

Pros

  • Simplified repayments
  • Fixed repayment schedule
  • Lower total interest expenses
  • Repaying your debts sooner
  • Saving your credit score

Cons

  • Incomplete solution to long-term financial difficulties
  • Upfront costs
  • Temporary drop in credit score

What are the alternatives to Debt Consolidation?

There are several cheaper and simpler alternatives to debt consolidation. Depending on the nature of your debt, you may have other options.

If you’re worried about money you owe to the IRS, the IRS offers a simple path to coming up with a new payment schedule. Go to the IRS website for payment plans and installment payments.

If you have medical debts, try to see if you can have them partially forgiven or canceled before resorting to debt consolidation.

If your total debt balance is low (below $10,000), you can consider other debt consolidation options. In fact, most debt consolidation companies will direct you to alternatives to debt consolidation if your debt isn’t so severe.

What Are the Requirements for Debt Consolidation?

Companies will have different requirements for debt consolidation services and loans. First, they will plainly state the minimum debt you must have to apply for their services. Then, they will normally come with credit score, income, and other loan requirements.

When you apply for a debt consolidation loan, lenders will pull your credit score. Your credit history will determine your qualification and subsequent rates and terms you’re eligible for.

Example of Debt Consolidation

You have 3 credit cards with interest rates of 19.99%. Your total credit card debt is $5,000 and you must pay $1,000 in interest if you miss your next payment. You also have a car loan with a current balance of $10,000 at an interest rate of 5%. That means you must pay $500 in interest.

You take a debt consolidation loan of $15,000 with an interest rate of 8%. Your new interest payment for both loans is $1,200.

Debt Consolidation FAQs

What are the risks of a debt consolidation loan?

Do debt consolidation loans affect your credit score?

How do high interest rates affect my debt?

What is the difference between debt consolidation and debt settlement