Debt Consolidation Explained
For those who feel as if their debt is overwhelming, debt consolidation could be a viable option. Making monthly payments on a variety of financial obligations is time consuming. Missing payments, even by accident, could damage credit scores.
Debt consolidation combines financial liabilities into a single monthly payment. It’s an unsecured loan, so borrowers typically need good credit and a steady income to qualify. Often, the new loan has a lower interest rate and better terms than the individual debts. This saves the borrower money in addition to providing a means by which to pay down debt faster.
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How does debt consolidation work?
After getting approved for a debt consolidation loan, the borrower uses the funds to pay off their debts. This consolidates their debts into one monthly payment, which may be lower than their previous payments. Debt consolidation can be used for any type of debt, including credit cards, personal loans, and medical bills. Borrowers with less-than-perfect credit may still be able to get a debt consolidation loan, but they may have to pay a higher interest rate. A certified debt specialist can help borrowers understand their options and make the best decision for their situation.
Reasons to Consolidate Your Debt
Debt consolidation with the help of a debt consolidation company has some distinct benefits. Here are some reasons that borrowers may choose to pay off their various creditors through debt consolidation:
Bills are out of control
Juggling due dates, making multiple payments, and keeping track of balances on multiple accounts can be overwhelming. Combining those debts into a single monthly payment with a lower interest rate is one way to reduce the stress of out-of-control monthly bills.
It’s difficult to make minimum payments on credit cards
Making minimum payments on credit cards traps many borrowers in a cycle of debt that can last decades. For many people, the only way out is to pay off high-interest credit cards in full with a debt consolidation loan. Without an income high enough to make more than the minimum monthly payment, interest charges and fees make it nearly impossible to reduce the principal owed.
There’s no end date on debts
Some types of debt can trap borrowers in an endless cycle of payments. Consolidating these debts into a single loan with a defined interest rate and end date can, in some cases, help borrowers see progress and pay off their debt faster.
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What to consider when choosing a debt consolidation service
Whether a borrower chooses to use a professional debt consolidation service or go straight to a lender for a personal loan to pay off debts depends on their credit status and whether they need help getting and staying out of debt.
A reputable debt consolidation service won’t ask for money upfront to start the process of helping a borrower learn about their options. Look for a company that uses certified debt specialists to help their customers understand all the options for eliminating debt.
It’s important to read online reviews from current and past customers to understand whether a specific debt consolidation company is a good fit. This helps borrowers evaluate the trustworthiness of the company.
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After a free phone consultation that includes a complete debt evaluation with a debt expert, borrowers can decide whether to enter into a program that helps with outstanding debts for less than the total amount owed. For those who owe debts that are in collections or who want to eliminate credit card debt and close accounts, this type of debt elimination plan offers a single point of contact with a company that works with all creditors.
Things to be aware of when it comes to debt consolidation
Certain types of debt aren’t ideal for credit consolidation
In some cases, it may be less expensive and faster to work directly with the creditor. For example, medical debts may be eligible for reduction or elimination if you meet certain income thresholds.
Before considering a consolidation loan for medical debts, contact the original creditor to find out if you may be eligible for financial assistance. Even if you can’t qualify to have your medical debts reduced by the doctor or hospital, ask about entering into a payment plan with regular payments that fit into your budget. Most medical facilities offer no-interest payment plans that will help you eliminate the debt without hurting your credit.
Tax debts may also be eligible for a low-interest payment plan through the Internal Revenue Service (IRS), depending on your income level and financial situation. Compare the interest on a payment plan through the IRS before paying off tax debts with a consolidation loan.
It’s not recommended to use credit cards after consolidating balances
Consolidation loans can sometimes be a way to pay off credit cards with a lower interest rate and a fixed monthly payment. However, it's important to be disciplined and avoid using credit cards in an unmanaged way again. Even though closing accounts could hurt FICO credit scores, if the temptation to max out credit cards is too great, it’s better to cancel the cards.
Consolidation loans can drive borrowers deeper into debt
One advantage of using a reputable debt consolidation company to help evaluate debt consolidation options is having access to a debt expert that can help solve the spending and budgeting problems that led to high levels of debt.
Without actionable solutions to money problems, borrowers are likely to find themselves in worse shape with new debt in addition to monthly payments on their consolidation loan.
Consolidation scams are plentiful
Having a lot of debt is stressful. When researching consolidation companies, it’s crucial to take the time to find an organization that’s reputable, has great customer reviews, and has a long history of helping consumers get out of debt.
Be wary of consolidation companies that are new to the marketplace, make big promises, or require a deposit or funding fee upfront. Before turning over personal information to any debt consolidation organization, check their BBB ratings and reviews. Look for online reviews from customers who have completed the debt consolidation process.
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Could help reduce the total debt owed
Though debt can be lowered, the service itself does have a fee associated
Recommended debt: $25,000+
