Debt Consolidation

Debt Consolidation Overview

Debt Consolidation is just what the name sounds like. It is the process of combining all of your outstanding credit card debts into one or “consolidating” your debts into one single debt. It’s a loan. But the goal is that the new loan amount will have a lower interest payment than your current APR for your credit cards do. You will get all the information like you would a car loan or a home loan: the pay-off amount, the monthly payment, and the APR rate. Again, this will not reduce the balance you owe, just the interest rate.

It’s also more convenient because you are making one single payment a month and not sending payments to multiple credit card companies. Your APR will depend on your current FICO score. It’s wise to compare rates and lenders. Some of the larger banks will not offer debt consolidation loans. You need to calculate the long-term costs. Your initial monthly payments should go down; however, it’s wise to understand the total cost for borrowing. If you end up making more payments for a longer term, then your actual savings could be negligible. The loan amounts can range from $2,000 to $35,000 depending on the lender. There will also be administration fees with APR rates ranging from 9.95% for good credit scores to 35.99% for not-so-good credit scores.

Debt Consolidation in Detail

Debt consolidation is the process of combining your multiple debt payments into a single payment. This can be beneficial if you find it difficult to handle multiple payments each month. Debt consolidation isn’t a debt reduction – you’ll still owe the same amount of money. The difference is that you’ll only owe the debt to one lender, which can make it easier to pay off the debt over time. The goal in debt consolidation is to combine your many payments to one lower-interest rate payment.

One way to consolidate your debt is through a balance transfer credit card. This can be helpful if you have multiple credit cards with varying interest rates. You can even transfer non-credit card payments, such as medical bills, to a lower interest rate card. It’s important to take a look at the fine print, however. You’ll need to evaluate the terms of the low-interest rates, such as balance transfer fees and length of time on the special introductory rate. Using a balance transfer credit card could significantly increase your debt if you’re not able to pay off the debt before the interest rate increases.

Another debt consolidation option is a personal loan. Unlike a balance transfer credit card, a loan will ensure the same interest rate until the debt is paid in full. You’ll need to have a good credit score in order to qualify for a loan that offers a low enough interest rate to make it beneficial. Secured loans will offer the best interest rate, however they require collateral (such as a house or car) that the lender can take if you’re unable to make the monthly payments.

Both balance transfers and debt consolidation loans can be beneficial if you have multiple debt payments that you’re unable to manage. However, it’s important to take a look at your monthly budget to determine how much of a payment you can afford. You’ll also want to do your research on interest rates, which can vary depending on your credit score. Another thing to consider is how long it will take you to pay off your entire debt. Do the potential fees, interest rates, and length of payments make it worthwhile to consolidate your loans? If after doing your research you aren’t sure if debt consolidation is the right plan for you, it might be a good idea to look at your other options. Regardless of the plan you choose, you’ll want to work on a budget to ensure that you’re able to remain debt-free once you’re able to pay off your debts.

If you’re uncertain about what is the best way for you to get out of debt, give one of our Debt Specialists a call. Their goal is to look at your individual financial situation and help determine the best plan for you.