Debt consolidation is a financial strategy that combines multiple debts into one debt, repaid by a consolidation loan or other methods.
Debt consolidation is particularly effective in the case of debt with a high interest rate, such as credit cards. This should reduce monthly payments, lowering interest rates on loans, which makes it easier to pay off your debt.
This debt reduction option organizes the mess with which consumers face each month, trying to keep up with the many bills from many loan companies and the many repayment dates. Instead, there is one payment to one bank, once a month.
And it saves you money at the same time!
There are two main forms of debt consolidation – incurring a consolidation loan or consumer bankruptcy and the loss of all assets. It depends on consumers which one best suits their situation.
Debt consolidation is also referred to as “account consolidation” or “loan consolidation”. Any name, debt consolidation should effectively get out of debt faster and eventually improve your credit score.
On this page you will find the cheapest consolidation loan and help needed to get it. On our homepage you will find a list of banks that provide consolidation loans .
- What is debt consolidation?
- How does debt consolidation work?
- Consolidation of debt with a loan
- Debt consolidation without a loan
- Should I consolidate my debt?
- When debt consolidation is not a good option?
- When not to consider consolidation
- Alternatives to debt consolidation
- Frequently Asked Questions
How does debt consolidation work?
Debt consolidation works when it lowers the interest rate and reduces the monthly payment to an affordable rate from unsecured debt, such as credit cards.
The first step towards consolidating debt is to calculate the total amount you pay for credit cards each month and the average interest paid on these cards. This provides the base number for comparison purposes.
Then look at your monthly budget and add expenses to basic products such as food, housing, utilities and transport.
For many people, there is enough to cope with debt if they organize their budget better and motivate themselves to repay the debt. However, these features – effective budgeting and motivation – are not generally visible when people do not pay for bills.
And this is the place where the debt consolidation program or debt management program can enter. Each of them requires one monthly payment (organization) and allows you to follow your progress when you eliminate debt (motivation).
Doing some research and calculations will tell you whether a loan or debt management program will help you pay off your debt more.
Consolidation of debt with a loan
A conventional method of debt consolidation is to get a loan from a bank, credit union or online lender. The loan should be large enough to eliminate all unsecured debts once.
The loan is repaid in monthly installments at an interest rate negotiated with the lender. The repayment period is usually 3-5 years, but the key element is how much you are interested.
Lenders carefully look at your credit score when determining the interest they charge for a consolidation loan. If you fail to repay your credit card debt, it is very likely that your credit score will also fall.
If the interest rate you receive for debt consolidation is not lower than the average interest rate that you already paid on your credit cards (see above), then a loan with debt consolidation will not help you.
There are alternative options for loans, such as mortgages or personal loans, but it does not help if you can not correct the interest rate you pay, or the repayment period is so long that it does not make sense.
It is possible to consolidate debt and reduce monthly payments without incurring another loan.
Non-profit credit counseling agencies offer debt consolidation through a debt management program that does not require a consumer to borrow.
Instead, non-profit credit counseling agencies work with card companies to lower interest rates and lower the monthly fee to an affordable level for the consumer.
… if you are ready to change your financial life, debt consolidation can help.
The consumer sends a monthly fee to the credit counseling agency, which then distributes the money to each lender in the agreed amount. The agency may also instruct card handling companies to waive late payments or overdelivery charges.
This is not a quick solution. Debt management programs usually take 3-5 years to eliminate debts. If you do not receive payment, you can cancel any interest rate and monthly payment concessions.
Should I consolidate my debt?
If you’re tired of waiting for your credit card balance to rise every month … and the balance reaches levels that start to overwhelm you … and you’re tired of the fear that brings you into your life every month … and you just need to plan that you can follow … it’s a debt consolidation is something that should be seriously considered.
In other words, if you are ready to change your financial life, debt consolidation can help.
Almost everyone who loses the battle with debt talks to each other every month. You want to be responsible for your money and want to move away from dependence on your credit card, you just need a plan.
Debt consolidation is a plan. It simplifies paying bills. It gives you a reachable goal to meet every month and ultimately allows you to breathe again. You will have to do some research and comparison, but the essence of debt consolidation can be summarized in this way:
When debt consolidation is not a good option?
If you do not plan to change your spending habits – that is, you still plan to use your credit card in everything you want – debt consolidation is not for you. The pursuit of your bills will never end.
Putting down your credit card would be the first step, but not the only one you need to consider before you decide that debt consolidation is your financial savior. Here are some other questions to answer:
- Do you want to make a serious monthly budget and stick to it?
- Does buying a new loan to pay off old loans (debt from credit cards) make sense?
- Do you want to calculate whether the fees and costs associated with the debt consolidation loan – not to mention the length of the repayment period – will save you money or cost you more money than the current payment arrangements?
- Do you understand that the debt management program requires a fixed monthly payment in order to preserve program privileges?
Alternatives to debt consolidation
The decision to reduce debt is very similar to the decision to reduce weight: the sooner you start, the easier it will be.
Debt consolidation is treatment at an early stage. However, if your debt reached an obese stage – not only overwhelming but also troublesome – you may need to look at debt settlement or bankruptcy as a way out.