Debt Consolidation Guide

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If you’re drowning in debt from unpaid loans and credit cards, it might make sense to consolidate them into one lump-sum monthly payment. A debt consolidation loan can take all of your debt from any source and merge it into one place. So instead of submitting separate payments to multiple credit cards and lenders, you would just have one payment to make to the lender who gave you the debt consolidation loan.

Escaping from debt can feel like an insurmountable feat. So is a debt consolidation loan the magic trick you’re looking for? It depends.

Types of Debt Consolidation

Considering whether or not you should consolidate your debt at all is a complicated issue. But on top of that yes-or-no question is the subject of how you should consolidate your debt. You have multiple options to choose from.

1. Personal Loan: With an unsecured personal loan, you borrow a specific amount of money from a lender or a bank. In the case of a personal debt consolidation loan, you take out a new loan that combines all of the debt you hold (or as much of it as you choose).

2. Home Equity Loan: You could also merge your existing debt into a new home equity loan. It operates essentially the same way as a regular personal loan, except that this loan is secured, meaning you stake your house on your ability to pay the money back according to the terms you agreed to. The upside is that, with a valuable piece of collateral attached to the loan, you can likely get a more favorable interest rate. The downside is, if you don’t have the money to pay back the loan, you could lose your house.

3. Balance Transfer Credit Card: While this option doesn’t involve taking out a loan, it presents another avenue to consolidate your debt. With this particular kind of card, you transfer your debt balance into one place and pay it off with one monthly payee.

Debt consolidation can seem counterintuitive—the solution to taking on too much debt through loans and credit cards is to take out another loan or open up another credit card? At first glance, that would seem to make the problem worse, not better.

If that’s your gut response to the idea of debt consolidation loans, that’s probably a good sign. This isn’t the right move for every circumstance, and you should only proceed with debt consolidation after thoroughly weighing your options. But there are certain conditions where debt consolidation can help you take important strides towards alleviating your debt burden.

Pros of Debt Consolidation

Debt consolidation exists for a reason. For individuals who have struggled with debt problems and haven’t been able to make progress breaking even, there can be tremendous upsides.

  • Simplify Your Debt: There are two primary reasons people struggle to get out of debt. First, you probably have too much of it. That’s a given. But second, you might have debt from too many different places. Sure, the amount of debt contributes to the problem. But it can also be difficult to successfully manage paying off your debt if you’re juggling multiple student loans, a home loan, a personal loan, on top of having debt with multiple credit cards. With numerous monthly payments the likelihood of missing one increases, adding more fines and penalties to your already mounting debt. A debt consolidation loan doesn’t make your debt disappear, but it does streamline it into one monthly payment. With one bill to pay as opposed    to several, you’re much less likely to accidentally miss a payment, saving you money on potential late fees and likely reducing your stress levels.
  • Get a Better Interest Rate: Consolidating your debt into a personal loan can be something of a fresh start. No, it doesn’t wipe your debt slate clean. But taking out a loan is an opportunity to negotiate a new set of terms and conditions. If you’re swimming in debt from multiple sources, you’re likely paying different rates for each loan and credit card you have. A debt consolidation loan will have one interest rate that will dictate how much you need to repay. If you find the right loan, there’s a good chance you can get an interest rate that is lower than the average one you’re paying currently on all of your debt from each of the various sources.Now, it’s important to note that there’s no guarantee you’ll find a loan with a better interest rate. Especially with a less-than-stellar credit rating, it can be difficult to secure a loan with a low interest rate. It’s possible, and there are options out there, but it’s far from certain.
  • Get Rid of Debt More Quickly: Especially if you manage to secure a low interest rate, a debt consolidation loan can help you pay off your debt faster. By streamlining your repayment process and minimizing your risk for incurring additional fees and penalties, consolidating your debt can prevent you from falling further into debt. And with a more favorable interest rate, you might even have less money to repay than you would have otherwise. With a lower total interest payment, it will be easier for you to make your monthly payments and, over time, to eliminate your debt entirely.
  • Work to Improve Your Credit: Your credit rating is, in part, a reflection of your track record of making on-time payments. If you have a low credit score, chances are you have a history of late or missed payments. And having massive amounts of debt from multiple loans and credit cards probably doesn’t make it any easier for you to make your payments by the their due dates. But with a debt consolidation loan, you would only have one payment to make. And with only one payment to make, chances are better that you’ll be able to make it on time. And by making those payments on time, you’ll slowly improve your credit score. Yes, a debt consolidation loan can help you eliminate your outstanding debt, but it doesn’t mean that you’re no longer at risk of ever falling back into debt again. To prevent a recurring cycle of indebtedness, you need to make lasting change. You need to improve your credit score so you can get future loans and credit cards with more customer-friendly terms and conditions.

Risks of Debt Consolidation

The upside of debt consolidation is real, but it’s not without risk. By carrying so much debt and entering into the borrowing marketplace, you’re especially vulnerable. Predatory lenders might recognize that you’re in a more desperate position than other consumers, and they can use that leverage to get you to sign up for a loan that is not in your best interest. Even if a lender is perfectly benevolent, they still need to make money from the deal, and they might only be willing to take you on as a customer if they’re compensated for the risk they’re accepting by working with someone with a low credit rating.

Here’s how you can protect yourself.

  • Do the Math: As we’ve said before, not every debt consolidation loan is going to work for you. While you might find a loan with a relatively low interest rate, you might not. If the interest rate being offered to you is higher than the average interest rate you’re paying on all of your debt, then you probably want to turn it down. If the loan isn’t going to help you pay less money and get rid of your debt faster, then it’s likely not worth the extra convenience of having just one payment to worry about.
  • Beware of Scams:  With lots of debt and a poor credit rating, you can’t expect to get an incredibly friendly loan deal with a super low interest rate. If it seems too good to be true, then it probably is. There are predatory lenders out there whose mission is to get you to sign up and then take your money and run without using it to help pay off your debt. As you wade into the market, make sure you stay vigilant.
  • Do Some Self-Reflection:  A debt consolidation loan is not a panacea. Yes, it can help you get out of your existing debt, which is extremely important. But it won’t help you avoid falling back into debt if you haven’t changed the behaviors or circumstances that led you into debt in the first place. So while you’re looking into debt consolidation options, also stop and think about how you got into this situation. Do you still have a house you can’t afford? Are you still making too many unnecessary and expensive purchases? If you want to liberate yourself from debt once and for all, those things need to change, too.

A debt consolidation loan isn’t a magic trick. It’s a sensible solution that could benefit all parties involved, including your debt holders, your new lender, and, most importantly, you. So long as you view it realistically then you’re more likely to make a sound decision about whether a loan is the right choice for your circumstances.

Typical cost is

$866/Month

Assumes 15% APR on $25,000 in debt and a 3 year loan