What is Debt Consolidation?

Debt consolidation is a great tool for borrowers who find themselves balancing several open-ended accounts. Being in debt is common, but there are many ways to work your way out of it so you can get back on your feet and build your credit.

Finding debt assistance can be tricky, especially since there are numerous fake companies and scammers out there who prey on desperate borrowers. However, there are several ways to tell the difference between legitimate relief programs and scams. With a few tips and tricks, you can be on your way to getting yourself out of debt.

Getting debt help is nothing to be ashamed of; in fact, most consolidation companies simply hand you the tools to help yourself. With careful budgeting and planning, you can use debt relief services to slowly rid yourself of steep bills and loans. To learn more about consolidation and to see if it’s right for you, continue reading the topics below.

Methods of Debt Consolidation

Debt consolidation is the act of compiling several sources of debt into one, easy-to-manage loan. There are dozens of ways to consolidate. The method you choose depends on several factors, such as:

  • The total amount of debt.
  • Credit score.
  • Age.
  • Financial status.
  • Homeownership status.

The most common type of debt assistance is a balance transfer. This requires the borrower to open a new line of credit or use an existing credit card to transfer the remaining balance onto one card. The goal is to merge several open-ended loans into one, with one interest rate and easy-to-remember due date.

Borrowers with high credit scores may qualify for balance transfers with zero fees or other perks for the first year. This can be the most cost-effective consolidation plan.

Another common type of debt help comes in the form of a loan. These loans typically offer lower interest rates than those attached to open-ended accounts. It is important to note that rates vary among borrowers and change based on total debt amount.

Debt consolidation may also be achieved through a home equity loan. If you are a homeowner, you may choose to borrow against the equity in your home using a home equity loan or home equity line of credit. Then, you may use the loan to pay off your lines of debt.

It is important to note that this type of loan must be paid off in a certain amount of time. On the other hand, a home equity line of credit is an open-ended account (like a credit card) that you can borrow against.

The advantage of home equity loans and lines of credit comes in the form of lower interest rates and higher borrowing limits. However, it is a big risk; if you fail to make your payments, the lender can foreclose your home.

Will I Benefit From Debt Consolidation?

Seeking debt consolidation is not always the best move for everyone. You can use a consolidation calculator to estimate the total amount of money you’ll save by merging your debts into one loan.

To use a consolidation calculator, be sure to include all sources of debt. These include:

  • Credit card debt
  • Personal loans
  • Student loans
  • Car loans

Be sure to provide accurate debt information as you go. For each line of debt (i.e. each credit card or loan), enter the total amount of debt, rate of interest, payment type and monthly payment. The calculator should only be used as an estimate. Talk to a consolidator for up-to-date information.

Not everyone will benefit from a debt consolidation loan. To see if it’s right for you, calculate how long it would take you to pay off your current lines of debt at the speed you’re traveling. Then, compare these timeframes to a possible consolidation loan you are considering.

The best candidates for debt help are those with solid credit scores, as they will receive lower interest rates and more perks. Currently, loan rates range between 6 and 36 percent. The difference in rates depends on credit; the higher the borrower’s score, the lower the interest rate.

The best way to secure a low interest rate on a consolidation loan is to increase your credit score before applying for assistance. You can do this through on-time payments, low balances and limiting your lines of credit.