Debt Consolidation 101
Basics of Debt Consolidation
Are you overwhelmed by the sheer number of debt payments that you have to make each month? Many people find themselves buried in debt because they have too many loan and credit card bills coming in. One option for extracting yourself from this common problem is to consolidate your debt. This guide explains what debt consolidation is, different ways of consolidating your debt and some things to think about to determined whether or not debt consolidation is right for you.
What is debt consolidation?
Basically this just means that you aggregate all of your debts together so that you are only paying one lender one time each month rather than making separate payments to a bunch of different lenders like you probably do now.
Why people consolidate debt
There are many benefits to debt consolidation. Some of the reasons that people consolidate their debt include:
o To lower monthly payments. One of the main reasons that people are interested in debt consolidation is because it typically allows you to reduce the amount that you owe each month. This makes your debt more manageable. If you are having trouble making payments then this can make it easier. If you’re already making the payments, this can allow you to pay down the principal of the debt more quickly.
o To have only one bill to deal with. A lot of people simply like the option of having to pay only one bill each month instead of money. This makes it easier to remember to make the payment. It makes it easier to keep track of what’s going on with the debt.
o To reduce the amount of interest paid on each debt. One great thing about debt consolidation is that you only have one interest rate to deal with each month instead of the different rates on each loan that you probably have now. If you can lock in a low interest rate that is lower than the individual rates that you’re currently paying then you’ll reduce the amount of interest that you’re paying. That means that you’ll spend less over the lifetime of the loan, borrowing that money for a cheaper lower rate.
Debts that you don’t want to consolidate
Even though there are all of these benefits to debt consolidation, there are drawbacks as well depending on the different type of loans that you have. Some types of debts that you won’t be able to consolidate or should elect not to consolidate include:
o Federal student loans. You can consolidate these loans together under a federal school debt consolidation loan. However, you shouldn’t roll them up with your other debts. That’s because these loans have perks, like flexible repayment, that you’ll lose if you consolidate them with other private loans.
o Low interest loans. If you have some loans that are already locked in to a very low interest rate then you don’t want to consolidate them into a loan that has a higher interest rate. Be sure to look carefully at this before you do debt consolidation.
5 ways to consolidate debt
There are many different options available to you if you are interested in debt consolidation. Five of the most common ways that people consolidate their debts are:
1. Use your home equity to refinance your home and consolidate all of your debt. If you are a home owner then this is often the best way to do your debt consolidation. You can get a loan using the equity of your home and use that money to pay off all of your other debts. Then the only debt that you owe is the one on your mortgage. This is great because it typically offers the lowest interest rate compared to other options.
2. Get a personal loan for debt consolidation. If you have good credit then you can probably qualify for a low interest personal loan. You may get this through your bank or through an alternative lending source such as a peer-to-peer lending club. You would use the personal loan to pay off all of your other debts, effectively consolidating them into one loan.
3. Get a private loan. If you have a friend or family member that has access to funds then you may be able to get a private loan through them. They pay off your debts and you owe them for the balance. There are pros and cons to mixing money and relationships so this isn’t always the best option but it is an option that is available.
4. Transfers your balances to one credit card. If you have a fairly low amount of total debt then you may be able to do a balance transfer on your credit cards to put all of the outstanding debt on one card. You would obviously want to select a card with a low APR for balance transfers. Ideally you would also get a deal for a no-fee or low-fee balance transfer. You don’t want your debt consolidation to cost you a lot of money.
5. Work with a debt management company. There are businesses that specializes in debt management. Typically you pay them a fee and they pay off your loans for you. Then you owe them the balance on the loans. The good part about this is that it can sometimes mean that the total amount owed on your loans is decreased significantly. The bad part is that it has a lot of risks and may affect your credit scored negatively. This should be a last choice option for debt consolidation.