Summary
Debt consolidation simplifies multiple debts into one payment, which may reduce monthly costs and interest rates.
It’s a suitable strategy for individuals with good credit and various unsecured debts.
Debt relief may involve forgiving a portion of the debt, offering an alternative solution.
CreditAssociates® can help reduce what you owe by up to half in as little as 24-36 months.
Is Debt Consolidation Right for Me?
Struggling with debt can be exhausting in and of itself, however, keeping track of multiple loans can be brutal. If you find yourself missing payments and racking up interest fees from numerous creditors, then figuring out what is debt consolidation may be the relief you need.
If you already have debt collectors calling you up, then there isn’t any time to waste in getting your financial affairs in order. You should contact a credit counselor to create a debt relief program that will suit your needs. Before you jump into signing up for a debt relief program, read further to learn what is debt consolidation.
What is debt consolidation
If you are dealing with multiple loans such as payday loans, medical fees, credit card payments, and are wondering “should I consolidate my debt” then a bill consolidation program is a service that can help organize all of your debts into a single payment. In order to reduce the number of creditors that you need to pay on a monthly basis, you’ll apply for a debt consolidation loan. This loan will be used to pay off the outstanding debt you hold to the multiple creditors and you’ll begin making a solitary payment to the new creditor.
The convenience that comes with making a single payment every month can be an emotional relief that will allow you to focus on your future financial goals. Through credit consolidation, you can even save more money in the long term than if you were to continue with the multiple payments to multiple creditors. By negotiating a fixed APR with your debt consolidated loan, you could save a tremendous amount of money than if you were subject to the whims of a variable APR on a large sum.
Making one payment can be more convenient and could save you over the long term if the interest rates remain lower. If the rates are a variable APR rather than fixed, the interest rates could rise significantly over the course of the loan and with a larger overall balance that makes a big difference. So, as you think about debt consolidation, consider all the terms of the new debt consolidation loan, and the overall costs.
If you’re dealing with multiple unsecured loans (loans not backed with collateral, such as a house or a car), have good credit, and a consistent stream of income, then a debt consolidation loan may be the right fit for you.
How does debt consolidation work
Debt consolidation is a program designed to help you manage the debt you’ve accrued. Through consolidating your loans and establishing a new payment plan, you can find yourself debt-free within the next few years.
To begin the process of consolidated credit, you’ll need to contact a credit counselor. Speaking with a qualified debt relief counselor can help determine which program for debt relief would benefit you the best and help you answer “is debt consolidation good for you.” During your first meeting, you will cover the many aspects of your financial status and learn how you can improve your situation.
By taking up a debt consolidation loan, you’ll be consolidating all of your unsecured debt. Unsecured debt includes personal loans, medical bills, credit cards, and potentially some student loans. Because unsecured loans aren’t backed with collateral, they generally hold higher interest rates. Most consolidation programs attempt to negotiate with the creditors to obtain a lower interest rate, helping you to pay less every month.
How does debt consolidation differ from debt relief?
Not everyone realizes that debt consolidation and debt relief are separate terms for different financial services. While there may be some similarities in the goal of financial relief, their process and outcome can be vastly different.
The concept of debt consolidation is to fulfill the obligation of paying back the entirety of the debt. The process of paying off the debt comes either through the formation of a debt management plan (DMP) or through the aforementioned debt consolidation loan. Each attempt to combine numerous bills into a single monthly fee where the debtor can eventually be free within three to five years.
Debt relief is designed around fulfilling part of the obligation of paying back the debt and having the remaining portion (up to 75%) written off or forgiven. The best process of paying off debt is through debt settlement.
Bankruptcy is normally the final resort for many people, as you have to stand before a judge and declare yourself financially unfit to pay your bills and permanently have a black mark on your financial status.
Pros of debt consolidation
It’s currently estimated that the average American who owns a credit card has at least 7 of them. If all of these cards hold a balance and are coupled with a mortgage, student loans, and car loans the number of bills can stack up quickly. If you find that you haven’t brought in enough income to fulfill all of your financial obligations, then it can be hard to choose which to pay first and which to lapse, a process that can become very expensive very quickly even with just a single missed payment. By consolidating your debt, you need to keep track of significantly fewer payments.
By focusing your debt to a single payment, you’re also freeing yourself from the stress of maintaining multiple bills. By consolidating your debt you’re taking back your autonomy over your finances and over your mental health. You’ll have a better picture of your financial standing by only having one statement to contend with, and seeing the debt being paid off can be inspiring to continue on your financial goal.
Your unsecured credit card debt generally comes with inflated interest rates, by consolidating your debt into a secured loan, you’ll most likely get a much better interest rate, meaning that you could pay much less in the long term.
Cons of debt consolidation
Debt consolidation may not always be the saving grace that it seems. If you have unhealthy spending habits to begin with, consolidating your debt will not solve the issue.
There is also the downside of transferring your credit card debts to a single secured loan, because the loan needs to be backed with collateral. This collateral can come in the form of your car, your life insurance, your 401k or IRA, or even your house. By consolidating down to one loan with your retirement plan as collateral, then when you come to retirement age, you may not have access to them until the debt is paid off.
Depending on the terms you’ve negotiated for your debt consolidation loan, then you may be on a payment plan that will last longer than your original unsecured, unconsolidated debt. This can result in more money paid out in interest over the long-term with a lower monthly payment.
If your debt isn’t significant, then consolidation may not be a viable option as the restructuring may not provide enough of a savings.
When you might need debt consolidation
You don’t want to wait until the last moment to consider debt consolidation, because there is a window of opportunity that you have to fall within to receive a debt consolidation loan. If you’ve waited too long and your debt is larger than 40% of your gross income (excluding a housing loan) or if your credit score has fallen too low to qualify for a low-interest debt consolidation loan, then you might have to look for different options.
When taking on any form of debt relief or consolidation, you need to make sure that you have a plan to protect you from repeating past mistakes. If you haven’t gotten your spending habits under control, then you could be digging yourself into a deeper hole with debt consolidation. However, if you have a plan in place to prevent taking on further debt and you can maintain an income to cover your payments, debt consolidation can be extremely helpful.
CreditAssociates and debt consolidation
Debt consolidation programs combine all of your outstanding debt into one large loan, essentially replacing your current loans with a new one. They sometimes require you to secure the loan with collateral of greater value—such as your home—which can seriously impact your future.
Rather than take that risk, CreditAssociates offers debt settlement, negotiating with creditors to greatly reduce your high-interest debt without the need of collateral. It’s a straightforward process and includes committing to smaller monthly payments, so that you can manage your debt without sacrificing your future goals.
Typically, debt settlement programs take 24-36 months to complete, meaning you could be completely debt free in around two or three years. On the other hand, debt consolidation can stretch out for extended periods, depending on the size and varying terms of the loans. Why get caught up in the long and confusing process of debt consolidation when debt settlement will make your monthly payments smaller and your time spent in debt shorter?
Getting started with debt relief is as easy as picking up the phone and talking to one of our certified Debt Consultants. Contact us today for a free consultation.
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Common Questions
Is a good credit score required for debt consolidation?
Yes, having a good credit score is generally required to qualify for the most favorable debt consolidation loans. A strong credit score suggests to lenders that you are a lower-risk borrower, which can lead to lower interest rates and better loan terms. However, there are debt consolidation options available for individuals with lower credit scores, though these may come with higher interest rates. It’s important to thoroughly research and compare offers to ensure you find the best solution for your financial situation.
Can debt consolidation affect my mortgage application?
Debt consolidation can have an impact on your mortgage application, both positively and negatively. On the positive side, consolidating your debts can lower your monthly debt payments, improving your debt-to-income ratio, an important factor lenders consider when approving mortgage applications. On the negative side, applying for a new loan to consolidate debts can result in a hard inquiry on your credit report, potentially lowering your credit score temporarily. Additionally, taking on a new loan increases your total amount of debt, which could be a concern for mortgage lenders.
What types of debt can I consolidate?
Debt consolidation typically includes various unsecured debts such as credit card debt, personal loans, medical bills, and in some cases, student loans. It’s important to note, however, that not all student loans are eligible for traditional debt consolidation programs, especially if they are federal student loans. Federal student loans may be consolidated through a Direct Consolidation Loan from the U.S. Department of Education, which is different from private debt consolidation. Military-related debts, such as those related to VA loans, have specific guidelines and may require separate consolidation options. Always check with a debt consolidation professional to understand which of your debts can be effectively consolidated.