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Are you struggling with debt or looking for a way to simplify your monthly payments? If so, then this article could help. We’ll talk about some methods of consolidating debt in order to find what works best for you.

What is debt consolidation?

Debt consolidation is when multiple debts are combined and the debtor makes monthly payments to a single source. Debt consolidation loans typically carry lower interest rates than your outstanding debts, such as credit cards.

How does debt consolidation work?

Debt consolidation works by combining the balances of multiple accounts into one monthly obligation, making it easier to manage. When a person consolidates their debt, they have one big loan instead of many smaller ones. This means that you will only need to pay one company every month instead of making multiple payments to each creditor. However, one downside of these loans is origination fees, which are typically 3-5% and add to your outstanding debt.

A Few Methods for Consolidating Your Debt

While there is no one-size-fits-all approach, here are a few strategies you can use to consolidate your debt:

Balance transfer card

Balance transfer cards can help you consolidate your credit card debt to a single, lower-interest loan. Transferring balances from high-interest rates to low ones usually comes with a fee that will add onto the total amount of money owed. If you find yourself unable to pay back what you owe, debt settlement could be a good fit for you. Debt settlement companies negotiate with creditors on your behalf to reduce the amount you’re required to pay back, providing you a path to debt resolution in as little as 24–36 months.

Home-equity loan

Home equity loans allow homeowners to borrow against the equity in their home, but this is not a good option for individuals who have deep debt problems. These loans turn unsecured credit card debt into a secured debt, with your home being used for collateral. If you are unable to keep up with your payments, your house could then be at risk for foreclosure. Before making a decision like this, we recommend speaking with a certified debt consultant to explore all of your debt-relief options. 

Ask your family for help

You may not want to ask for help, but it could be your best chance at getting out of debt. If family and friends have the means to lend you money, they will usually do it. These loans typically come without charging interest—but defaulting on a loan can ruin relationships. Be careful when choosing this route: define clear terms before borrowing any cash from loved ones.

Another downside to this method is that it won’t help you avoid future debt. If you’re struggling with debt, then consider contacting an expert debt consultant who can help you find the right strategy for getting out, and staying out, of debt.

401(k) loan

A 401(k) loan is a way to borrow money that you’ve saved up in your retirement account. One drawback of taking out this type of loan, however, is that doing so will decrease the total amount invested and cost more over time than it would if the loan wasn’t taken out in the first place.. You can only apply for these types of loans depending on what plan your employer has set up (and they may not offer them). There is also a limit of $50,000 or 50% of your vested account balance, whichever is less. 

Debt management plan

Debt management plans are an agreement with a counseling firm and creditors, where the debtor agrees to make a single payment that is divided among the creditors. One of the drawbacks of this program is that it’s mostly for credit card debt, and can take up to five years. It also restricts your ability to use credit cards or get new lines of credit, and missing a payment could end your interest rate reduction.

Cash-out auto refinance

Cash-out refinancing of a car loan is the process of replacing your current auto loan with another one, and borrowing an additional amount against the equity in your vehicle. With cash-out refinance, you might be able to get a better interest rate on your auto loan—but it could come at a cost: increasing debt or owing more than what’s owed for vehicle down payment.

Debt settlement

Debt settlement is an excellent option for those who need debt relief but can’t afford to pay the full amount of their outstanding debts. Debt settlements may result in you saving up to half, or more, on the total amount owed. This reduction can help you get your finances in order and free you from credit card bills much faster than if you were making minimum payments each card, each month. Debt settlement companies can offer affordable monthly payments so that you can keep more cash in your pocket each month, while still working towards resolving your debt. 

Okay, so what’s the best way to handle my debt?

The answer depends on your situation. While debt consolidation can help some people get out of debt, it can take up to 3-5 years, or more, to resolve your debt with this type of loan. It also can result in you paying more than what you initially owe since lenders will usually charge origination fees which are typically 3-5% of the loan amount. Debt settlement is an excellent alternative for those looking for quicker debt relief. We recommend reaching out to a debt consultant who can evaluate your situation and provide more information on how you could get out of debt for less than you owe.

A Few More Common Questions About Debt Consolidation: 

Is it smart to consolidate debt?

While getting out of debt is smart, debt consolidation might not be the right solution for everyone. This type of debt relief can simplify your overall situation and possibly provide reduced interest rates, but can be challenging to qualify for as most companies require you to have a high credit score. It also doesn’t reduce the total amount you owe, but simply consolidates all your debts into one place. If you cannot afford to pay back what you owe, debt settlement might be a better option for you. 

Do consolidation loans hurt your credit score?

Debt consolidation can negatively impact your credit score in two ways: a hard inquiry and closure of accounts. While these impacts on your credit score may not be permanent, they can limit your ability to get loans in the future.

Is it better to get a personal loan or debt consolidation?

A personal loan and debt consolidation are essentially the same thing. A personal loan is a form of credit that can be used for anything you choose, while a debt consolidation loan is a personal loan that you use to pay off your debts. Choosing to use a personal loan to pay off your debts is what makes it a debt consolidation loan. Qualification and financing terms for both of these loans are dependent on your credit score.

What’s the quickest way to get out of debt?

One of the quickest ways to get out of debt is to work with a certified debt consultant. These professionals have experience negotiating with creditors and may be able to help you significantly reduce your debt in as little as 24–36 months. Start the process by calling 1-800-983-6693 for a free debt evaluation.

Is debt consolidation a bad idea?

Debt consolidation can be a bad idea if you don’t have the personal discipline to make your payments on time every month. Defaulting on these loans can severely hurt your credit. It can also hurt you if you aren’t willing or able to stop using credit and continue accumulating more debt. It is also important to pay attention to what interest rate you qualify for as you don’t want to consolidate your debt into a high-interest loan.