How to Consolidate Debt

What is Unsecured Debt?

Click here to learn more about unsecured debt, its implications, and how it compares to secured debt.

Understanding Your Debt Options

Know the pros and cons of Debt Consolidation Loans to understand your options.

Credit Card Consolidation

Know your options when it comes to Credit Card Consolidation. Click here to get more information.

Debt Consolidation Loan

Find out the reasons why you should consider Debt Consolidation Loan. Learn more about its advantages.

When it comes to dealing with debt, consumers have several different options. Different options will be better for different people, as everyone’s debt situation is unique. In order to help you make the best decision possible regarding your debt we’ve put together a guide that lays out some of the options. Check out the different choices that you have for dealing with your debt, and you’ll have the information you need to make the best choice for your financial situation.
How to Consolidate Debt

Pay Debt Yourself

One option for dealing with debt is to simply pay it yourself. This takes time and discipline, no matter how you go about it, but you won’t have to rely on any other methods or processes, and you won’t have to pay anyone for assistance in dealing with your debt, so you might be able to save some money.

No matter what, you’ll have to devote some extra money toward your debts every month in order to make this choice effective, so if you don’t have the extra cash on hand then you will probably want to consider other strategies.

When it comes to paying down debt yourself there are two basic strategies, debt stacking and debt snowballing. Each of these strategies has its own unique advantages and drawbacks, so make sure to use the one that works best for your financial situation and abilities.

Debt Stacking

The debt stacking strategy to paying off debt is to focus on making extra payments to the credit card with the highest interest rate. This will save you the most money in the long term if your balances are roughly similar. After you pay that card off you can then take the money you were dedicating to those payments and make massive payments on your remaining balances to attempt to quickly clear them all.

Debt Snowballing

Debt snowballing works a bit differently from debt stacking. In debt snowballing you focus on paying off the credit card with the smallest balance first, and then use all of the money you were making on payments to that to take on the next biggest balance. You then repeat this process over and over until your debt is paid off. This strategy is best for people who have cards with different balances on them so that you can pay one card off quickly and then rapidly reallocate those resources to the next card.

Get a Consolidation Loan

Another option that many people might consider for resolving their debt is a consolidation loan. A consolidation loan works by taking out a new loan at a lower interest rate than you are currently paying on your outstanding debts, and using it to pay those current debts.

The result is that you spend less money on accumulated interest charges, lower your overall interest rates, and simplify your payments into one easy to understand and manage due date. This lets you put all your debt into one lump sum account so you can easily track the progress you’ve made.

Additionally, because your interest rates are lowered, you’ll pay less overall on your debt over time. The result can be tens of thousands of dollars of savings over the course of your loan. Another result of the lower interest rate is that your monthly payments will be lower. You can use the extra money to get back on solid financial ground, or you can keep paying the same overall amount you were before and pay your loan off even faster and save even more money in the long term.

As a result of these qualities, the consolidation loan option gives consumers a tremendous amount of flexibility and options for handling your debt. As a result, it’s a good choice for most consumers, but it is especially suited to people who are making their payments on time now and want to lower them or pay the same amount and pay their debt off faster. Debt consolidation is also a good option for people who are making their payments now but are living on a tighter budget than they would like. Finally, debt consolidation is also a good choice for consumers that are having problems making their monthly payments but can do so easily if those payments were lowered. 

One of the benefits that consolidation loans has over some other options is that they can be used to cover all kinds of debt, loans, student loans, charge cards, car loans, and more. This gives them more flexibility and coverage than a balance transfer card. 

Balance Transfer

A balance transfer is when a consumer moves the balance of one or more credit cards to a different credit card with a lower interest rate. This lets you pay off debt faster and stop the accumulation of interest charges. You’ll have a lower monthly payments because of the reduced interest, and will be able to pay your balance off faster while saving money in the long term on interest rates and charges.

Another benefit to a balance transfer card is that you can usually get some great deals on the interest rate for the balances you transfer. That means you can have several months or even a year of zero or low interest to make progress against your debts.

One of the downsides of balance transfer cards is that they
are only good for paying off other credit cards or retail store credit
accounts, they usually can’t be used to pay things like student loans, car
loans, personal loans, or any other kind of non-revolving debt. This limits
their utility to consumers who have a diversified debt portfolio, which is what
the credit agencies recommend for consumers to improve their credit score. 

Debt Settlement

Debt settlement is a process of negotiating a lower total amount for your debt and then paying it off all at once. This can be a tricky process, as your creditors and lenders are not required to accept any debt settlement process at all. Moreover, you need to have the cash on hand to pay off the entire settled balance all at once. You will also have to prove that the funds you will have for the debt settlement payment will only be available for settlement. Usually this is because the money is coming from a source you can’t control, like a relative or some trusts. 

Furthermore, you’ll have to stop making payments on your debts for an extended period of time before your lenders and creditors will be willing to negotiate a settlement with you. This will seriously affect your credit score in a very negative way. The result will be that you’ll have to spend years rebuilding your score to get favorable offers from lenders and credit card companies. 

Another way that debt settlement can affect your credit score is that the lenders you settle with will note that your debts were settled for less than the complete balance. This will make you look like a risk to other lenders and creditors, no matter what your credit score is. 

Debt settlement has other costs as well. You will usually have to hire a debt settlement agency or a lawyer to get your debts settled and engage in negotiations for you. You can do this yourself, but you’ll almost always get better results paying a skilled expert to help you negotiate with your creditors and lenders. These agents charge frequently charge a percentage of the money they wind up saving you. For example, if you owe $100,000, and your representative negotiates your debt to $90,000, you’ve saved $10,000. If your representative takes 10%, then you will owe them $1,000. You can see how this can quickly add up when dealing with larger amounts of debt. 

All of this isn’t to say that debt settlement isn’t a good choice. If you’ve been having problems paying your bills for a while, or you already have a very low credit score, then there’s no real impact to a lot of the downside that debt settlement creates. If you can arrange to successfully settle your debts, then you’ll wind up paying less than you owe. However, the savings might not be too great, and you should make sure you understand the arrangement that you have with any representatives that you hire to negotiate on your behalf so you have a complete picture of the financial situation you’ll be getting in to. 

Debt Consolidation FAQs

What is Debt Consolidation?

Debt consolidation is the process of taking out a loan and using that loan to cover your current debts. The consolidation loan you take out will be at a lower interest rate than the debts you are settling. This has a few implications.

  • Your monthly payments will be lower once you’ve consolidated your debts, which means more money in your pocket.
  • You can use the savings from your debt consolidation loan to make bigger payments on your loans, letting you pay your debt off faster.
  • The lower interest rate on a consolidation loan means that you’ll save thousands or even tens of thousands of dollars over the lifetime of your loan. That means more money in your pocket overall.
What Can I Consolidate?

You can consolidate any debt that you have. Your individual consolidation loan lender might have restrictions, so you should be sure to check that out first before assuming your debts can be paid by your consolidation loan.

One example is specialized consolidation loan products. If you take out a student loan consolidation loan, you cannot include credit cards that you had in college, even if they were used for educational expenses. As a result, you should be sure that your consolidation loan will cover all the kinds of debts that you want to consolidate. You should also consider specialized consolidation loan options if you are trying to consolidate one type of debt. Student loans are a good example here too. Specialized consolidation loan products usually have better interest rates than general consolidation loans, so you’ll be able to get a better deal.

Consumers have used consolidation loans to lower their interest and pay off a great many types of debt, including credit cards, medical bills, legal expenses, personal loans, business loans, car loans, and more.

How will Debt Consolidation Affect My Credit Score?

Debt consolidation can have a few different effects on your credit score. If you are having problems making payments now, then debt consolidation will almost certainly help your credit score long term because you will be able to make your payments on time, building up a good track record of covering your debts and preventing negative entries from late or missed payments.

Debt consolidation will have a small negative hit on your credit score at first because it will register as a hard credit inquiry. Your score can also be altered if debt consolidation dramatically changes the mix of credit types you have. Finally, your credit score can be affected depending on how you handle the accounts you consolidate. If you close the accounts that can affect your average age of credit, credit limits, credit limit usage, and other factors. It’s always a good idea to talk to a financial advisor or planner to get a solid understanding of how different actions will alter your credit score whenever you are considering major financial decisions.

What’s the Difference Between Secured and Unsecured Debt?

There are two different ways to issue debt. A creditor or lender can issue secured debt or unsecured debt. Secured debt is debt that is backed up by some form of collateral. For example, most car loans are secured by the car. That means if you don’t make your payments, then your lender can take control of your secured property in order to cover their losses.

One popular option for rebuilding a credit score is to take out a secured credit card with a lower limit. An example might be a $300 credit card that is secured by a $300 deposit. These credit options aren’t very risky to the lender, so you don’t need a very high credit score to get them. You can make on time payments to build your credit score and show that you are a low risk lending option in order to gain access to other credit products and better credit products in the future.

The other type of debt that can be issued is unsecured debt. Unsecured debt is that debt which is given without any kind of collateral. This is better for the consumer because the creditor has to go through complicated and tedious legal proceedings to take any of your property. Additionally, you don’t have to put any cash down up front for unsecured debt. However, you need a much better credit score to get unsecured debt compared to secured debt, especially in the realm of credit cards.

Do I Need a Loan for Debt Consolidation?

Yes, you need to get a loan for consolidation. Debt consolidation is essentially a loan. It saves you money because the new loan has a lower interest rate than the old debt. It also prevents the accumulation of interest charges for credit cards. The positive of taking out a loan to consolidate your debt is that you can consolidate any kind of debt, which is different from the thing that most closely resembles debt consolidation but doesn’t require a loan, which is a balance transfer card.

If you consolidate credit card debt without taking out a loan, then what you are actually doing is a balance transfer. A balance transfer is a bit different from other types of debt consolidation because it can only be used on credit cards. Additionally, balance transfer cards don’t usually have a lower interest rate than consolidation loans, although the balance transfer card will likely have a lower interest rate than the credit cards you currently have.

Are there Any Drawbacks to Debt Consolidation?

There can be some drawbacks to debt consolidation in the short term. Your credit score might take a hit depending on a number of different factors. Additionally, you will taking out another loan, and thus will have to make the payments on it, and make them on time or you could suffer an even bigger credit hit.

However, for most people, the benefits of a consolidation loan far outweigh the drawbacks. You’ll get a lower monthly payment and a lower interest rate, saving you money immediately on your monthly bills as well as overall along the life of the loan. This means more money in your pocket now and even more money in your pocket as you pay the loan down.

Additionally, because the payments are smaller you can make bigger payments and thus pay your debt down faster than you would be able to without a consolidation loan. As a result, many consumers have found that consolidation loans are the best option for resolving their outstanding debt.

What are the Benefits of Debt Consolidation?

There are several benefits to debt consolidation. The benefits all come from two aspects of a consolidation loan: a lower interest rate and a simplified payment schedule.

A lower interest rate has several benefits for consumers. First, it means that your monthly payments will be lower. You can use this money to save, put it toward other needs, or even put it back into your consolidation loan so you can pay it back even faster. This option to get out of debt faster is one of the benefits of a consolidation loan.

Another benefit that stems from lower interest rates is that you’ll pay less on the debt over the lifetime of the loan. This can save you thousands or even tens of thousands of dollars, depending how much debt you want to consolidate and how quickly you are able to pay back the consolidated amount.

The fact that you consolidate many different sources of debt into one loan makes the payments simpler and easier to track. You can see the progress you’re making against your total debt, and watch the balance go down quickly, which can provide a psychological boost that can be the difference between staying disciplined and falling into bad spending habits.

Moreover, your single loan payment is easier to schedule and plan for than multiple credit card or loan payments that all have different due dates. As a result, scheduling and planning your budget becomes easier, which gives you greater financial security and the ability to confidently save or even invest extra money into paying your debts off faster, opening a business, or just putting money away for a rainy day.

Should I use Debt Consolidation?

Debt consolidation isn’t right for everyone. You’ll need a reasonably good credit score and history, and you need to have enough debt to make it worth a lender’s time to consolidate it. Moreover, if you already have very low interest rates on your debt, then debt consolidation doesn’t provide as many benefits for you.

However, if you want to lower your monthly payments and interest rates and have a fair or better credit score, then debt consolidation is a strong option for helping you get your debt under control. You can save thousands or more over the course of your loan and can help you pay it off faster.

What Happens After I Consolidate My Debt?

After you secure your debt consolidation loan, your lender will send the right amount of money to your current creditors. You should keep paying your regular monthly bill for your current creditors until you consolidation lender or current creditor tells you that you balance has been eliminated.

Once your creditors have been paid, your debt will be consolidated into a single loan and you will start receiving monthly bills. You need to pay your bill every month, and you might consider taking the money you save and pay it toward the loan as well to help pay your debt down even faster. This will also save you money on interest because your balance will be lower when your interest is calculated, and you’ll be done paying before the full term, so you’ll be charged interest fewer times over the loan.

After your loan your credit score will also change. If you consolidated credit card debt you’ll probably see a large improvement because you’ll be utilizing less of your revolving credit, which has a huge boosting effect on your score.

Debt Consolidation vs Debt Settlement

There are several companies that offer debt consolidation
and debt settlement services. As a result, some consumers might be confused as
to the difference between the two financial products. Each is an option for
dealing with debt, and each works better in different circumstances.

When is Debt Settlement Best?

Debt Settlement is best if you haven’t been able to make your payments regularly for an extended period of time and have access to money you can use to settle your debt but that wouldn’t be available to make regular payments. Remember, when you settle debt your lender gets less money than they were expecting, so they’re taking a loss. This means that they will always prefer that you make your regular payments on your debt so they can get as much money as possible.

In fact, that’s part of the reason you usually need to be severely behind on your payments or have a bad track record of making payments in order to qualify for debt settlement options. In order for a lender to agree to a settlement they have to think that they are getting a better deal from settling your debt than by trying to collect on it. 

What are the Benefits of Debt Settlement?

When you settle your debt you no longer have that obligation, so you can stop worrying about monthly bills. You also wind up paying less than the full amount for the debt you owe, so you’ll save money overall. However, you should be cautious of anyone who says they can settle your debt for pennies on the dollar because businesses do not stay open by losing money. You will pay less overall, but probably not as much of a discount as you hope for. 

When is Debt Settlement Best?

Debt consolidation is best if you have been making your monthly payments and have at least a fair credit score. Debt consolidation means you’ll still have debt, but the interest rate will be lower, so you’ll pay less overall on the debt and your monthly payments will be lower. Debt consolidation is also better for people who have multiple different kinds of debt and debts that have many different due dates.

Debt consolidation is also an option for people who do not meet the qualifications to have debt settlement. This means they don’t have access to funds that can only be used for settlement, or that they have a history of on time payments and their creditors don’t have any incentive to settle their debts. 

What are the Benefits of Debt Consolidation?

Debt consolidation has several benefits, especially when compared to debt settlement. The first benefit is that you don’t have to ruin your credit score to be eligible for the process. Moreover, debt consolidation usually has a net positive impact on consumer’s credit score, as opposed to debt settlement, which will usually ruin your credit rating for many years. 

Debt consolidation also lowers your monthly payment. This is because the interest rate is lower and therefore you’ll have a reduced monthly charge. You can use the savings however you want. Many people choose to reinvest the savings back into their consolidation loan, which lets them pay down their loan faster, further reducing the overall cost of the loan.

The lower interest rate you get from a consolidation loan also means that you’ll pay less over the course of the loan. This can save consumers tens of thousands of dollars depending on how much debt they are going to consolidate. The result is that you’ll have more money in your pocket over the course of your life to spend on things you want instead of paying off your creditors. This can enhance your quality of life tremendously. 

Consolidation loans also make it easier to keep track of your payments, and they simplify your monthly budget. This can help with financial planning and allow you to put aside money to save, start a business, invest, or just have around for a rainy day. 

Final Words

As you can see, there are many different options for resolving your debt. Make sure to carefully consider the different type of debt relief options so that you can pick the financial product that is best suited to your particular financial situation. If your debt exists mostly in the form of credit cards, then a balance transfer card might be a good option, depending on the rates you can get when compared to a debt consolidation loan. If you are doing a good job making your payments now, then you might try to pay your debt yourself using either debt stacking or debt snowballing tactics. You might also consider a consolidation loan to lower your overall interest rate and reduce your monthly payments if you have a good track record of paying your loans and credit on time, and have a fair or better credit score.

No matter what option you take, you’ll be happier if you get out from under the shadow of debt. Any debt relief option that you choose is going to be better than dealing with complicated debt payments. After all, you work hard for your money, so you should do everything you can to ensure that more of it goes to you and less of it goes to creditors and lenders.