If you have a lot of debt, you may want to look into consolidating your debt to save money. Debt consolidation is basically a fancy way to describe combining multiple unsecured debts into one monthly payment. The goal of this is to try and lower your monthly payment by reducing the interest rates that you are paying on your debt. This in turn will save you money in the long run and allow you to pay off your debt faster.
Not all debt is eligible for consolidation. You are only able to consolidate unsecured debts. High interest credit cards and unpaid medical bills all fall under that category. They are also the most common reason people are dealing with financial problems.
How Debt Consolidation Works?
When you are consolidating your debt, you are basically taking out a new loan large enough to pay off your credit cards and bills. You do this so you are able to get a lower interest rate than what you are paying on your bills currently.
Let’s say that you owe $5000 on one credit card and $3000 on another and your interest rate on those cards is 18%. To consolidate them, you would take out a loan for $8000 and maybe work an interest rate of 6% on that loan. By doing this, you have lowered the interest rate you were paying and now your monthly payment will not be so large.
Debt Consolidation Companies Are Not All The Same
Finding the right company to consolidate your debt is important. Just because a company says they are “debt consolidators” does not always mean they are. A true debt consolidator will combine all your debt into one loan. Watch out for companies that say they consolidate but actually just manage your debt.
The first place you should look is your local banks and credit unions. Research what interest rates they can offer you and see how low you can get them. These places will probably be the easiest to find. If you have trouble obtaining a loan through them, you may want to look at other lenders.
What Are My Options When Consolidating My Debt?
There are several different options you have when consolidating debt. These include home equity loans, unsecured debt consolidation loans, and debt management programs. All three of these options basically do the same thing. They will combine your multiple debts into one and lower your monthly payment. However, they do not do it all the same way.
Unsecured Debt Consolidation Loan:
This type of loan is basically a personal loan that you would take out. You would go to your bank or other lender and take out a loan large enough to cover all your debt. Unsecured debt consolidation loans are the easiest way to consolidate if you are a decent credit score. Since you will be taking out a loan, if your credit score is too low, you will have difficulty getting a loan and a lower interest rate than what you are paying currently.
Home Equity Loans:
These loans are similar to unsecured loans except that you would put your house up for collateral. This way the lender has some security if you do not pay back your loan. Home equity loans are typically easier to get than unsecured loans but there is a lot more risk involved for you. If you miss a payment or are unable to pay your loan, you could possibly lose your house. Because of the high risk to you, home equity loans are not recommended unless you have tried all other options.
Debt Management Programs:
A debt management program is a completely different way to consolidate your debt. These programs are ways you can consolidate your debt even if you have really poor credit. Debt management programs work by paying a company to manage your debt. The credit counseling agency will negotiate and pay your creditors on your behalf and you will make payments to the management company.
Ultimately, debt consolidation can be a good option for you if you are dealing with a lot of debt. Make sure you do your research before agreeing to anything. Don’t let companies push you into something that you are not comfortable with. If you follow the above advice, you will be able to make a good informed decision whether debt consolidation is right for you.