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How to Consolidate Debt

If you have considerable debt with several different lenders, consolidating debt can be an attractive option, reducing the number of monthly payments you’re forced to keep up with. However, there are a few other things to consider before deciding if this strategy is right for you.

First of all, what is debt consolidation?

Debt consolidation typically happens when you take out a new loan and use it to cover other outstanding debts. Instead of making multiple monthly payments to various creditors, you make a single monthly payment on your new loan. This strategy could help you start on the path to financial stability—but it’s essential to know the details before making the decision to consolidate.

One of the biggest drawbacks to debt consolidation is that these loans can be hard to qualify for if you don’t have good credit. The most advantageous loans will be granted to those with the best credit.

Debt consolidation loans are also subject to fees that will further increase the amount you’re required to pay back. If you’re looking to reduce your monthly payment and the amount of debt you’re required to pay back, there are likely better options out there for you. Read about more types of debt relief.

How does debt consolidation work?

With debt consolidation, you’ll take out a new loan to cover existing debts. If you qualify for a loan with lower interest rates than your previous debts, it could help save you money on interest over the life of the loan. You’ll use the money from this loan to pay off your other debts in full, then continue making payments on the single consolidation loan every month. Debt consolidation could help make it simpler to track your expenses and pay off your debt if you’re currently juggling payments to multiple creditors.

Is debt consolidation right for you?

If you find yourself struggling to keep up with multiple payments each month, debt consolidation could be a good solution for you. However, debt consolidation is not always the best choice for everyone. For example, it might not be the right idea if you don’t have good credit. Banks and lenders look at your credit score when determining whether you qualify for a debt consolidation loan and having a lower credit score signals that you could be a high-risk borrower. As such, these loans can be hard to qualify for and carry high interest rates for those with lower credit scores.

Another element of debt consolidation that you should consider is that it does not reduce the amount you owe. If you are struggling with monthly payments, consider whether or not making payments on time would still be difficult even with debt consolidation. Missing a payment on a debt consolidation loan can wreak havoc on your credit score, impacting you negatively in the future.

What are alternatives to debt consolidation?

There are several alternatives to debt consolidation, including a process known as “debt settlement.” If you’re looking to reduce the amount of debt you’re required to pay back and pay off your debt with an affordable monthly payment, debt settlement could be a good option for you. Debt settlement also typically has a faster timeline than debt consolidation. Other options include attempting to qualify for a second mortgage or home equity loan to help pay off debts, or filing for bankruptcy. As with debt consolidation, each of these options comes with pros and cons that should be considered before making a decision.

How can CreditAssociates help?

CreditAssociates could help reduce your debt by negotiating with your creditors on your behalf. The CreditAssociates team has been in the debt-relief industry for over 14 years, so we have a long track record of assisting individuals in finding solutions to their debt problems. We can help you get back on the right track, too. A great first step is to see how much you could save on your debt, using our debt calculator. You could also call or fill out our form for a free, no-obligation consultation where we’ll learn more about your situation and provide advice on how to get started.

Common Debt Consolidation Questions: 

Which is better, debt consolidation or debt settlement?

That answer depends on your specific situation. With debt settlement, a trusted advocate will negotiate with your creditors to lower how much you owe. Meanwhile, debt consolidation simply means transferring your debt to a single loan. Often, we’ve found that debt settlement is the better option if you need to reduce the amount of debt you’re required to pay back. Read more about debt settlement vs. debt consolidation in this blog post.

What’s the smartest way to consolidate debt?

If you must go the debt consolidation route, make sure you thoroughly research any company or lender you’re planning to work with, and look for the lowest interest rate you can find. Read more here: What is debt consolidation: Is it worth it & should I do it?

Do consolidation loans hurt your credit?

Generally speaking, these types of loans will not hurt your credit if you stick to your payment plan. However, these loans can hurt your credit if you don’t make payments on time. It’s also important to consider that if you don’t have good credit, you might not qualify for a debt consolidation loan–or if you do, it might not be for the full amount you need or at an advantageous interest rate. If you don’t have good credit or feel like you owe too much to pay back, debt settlement might be a better option for you.

Are there other ways to combine all my debts into one payment?

Definitely. You can combine all your debts into one payment by taking a balance transfer, using a home equity loan, or debt settlement. Of these options, debt settlement is the only one that could help you become debt-free for less than you owe. Sound too good to be true? Read more here.

How can I get out of debt without paying?

It’s impossible to get out of debt without paying anything. People often regard bankruptcy as a way of “erasing debt,” but it actually allows creditors to recover part of what you owe them by forcing you to liquidate your assets (like your home or car), and comes with additional administrative fees. If you’re looking to reduce what you’re required to pay back, debt settlement could be a good option for you. Reputable debt settlement companies will negotiate with your creditors to cut down what you owe, typically by up to half or more.

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

A personal loan and a debt consolidation loan are essentially the same. The difference is that a debt consolidation loan is meant to pay off outstanding debts. Whereas with a personal loan, you have the option to use it to pay off your debts or to help finance something else like buying a car.

How to consolidate debt with bad credit

If you don’t have great credit, debt consolidation might not be the best option for you. Lenders look at your credit score when deciding whether to approve your loan request and if you have bad credit, this signals that you could be a high risk or unreliable borrower. However, there are many other debt relief options out there to consider that don’t require you to have good credit. Debt settlement is one option, and you don’t need good credit to qualify. And, a major benefit of debt settlement that debt consolidation does not offer is reducing the amount of debt you’re required to pay back to creditors. Interested? Learn more here.