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Debt Consolidation 101 Guide

Debt Consolidation 101 Guide

If you need help managing multiple debts, then you should check our Debt Consolidation 101 Guide. 

Nowadays, millions like you have accrued a staggering amount of debt due to various reasons. They’re trapped in a perpetual cycle of debt, unable to fulfill their financial goals. 

Thankfully, you can use debt consolidation to facilitate paying your unpaid balances.

What is Debt Consolidation?

You could borrow a lump sum to pay off your debts simultaneously. This is called debt consolidation, and it can be used to combine unsecured debts. 

You can consolidate debts that have no collateral attached, such as credit card debts. In fact, consolidation is typically used to manage credit card balances easier.

Debt Consolidation vs Debt Settlement

Some may conflate this with debt settlement, but the two are definitely different. The former combines unpaid loan amounts while the latter reduces them. 

Also known as debt relief, it involves an agency negotiating lowered debts on your behalf. If they succeed, you must submit a single payment for the modified amount.

How Does Debt Consolidation Work?

You could take out a debt consolidation loan to pay several debts easier. 

It will allow you to pay a singular monthly payment in lieu of several ones. The loan amount will have an interest rate too, but it’s usually lower than the debts included. 

How Does Debt Consolidation Work

Of course, you still have to pay on time, but combining debts can facilitate repayment. 

You could take out a home equity loan for debt consolidation if you’re a homeowner. Even better, you can receive lower interest rates compared to personal loan options. 

However, you risk losing your home if you fail to repay on time. It’s especially crucial to submit diligent payments, so you can avoid foreclosure.

Balance transfer credit cards add a unique feature for consolidating debts. You could request credit card balance transfers into a specialized card. 

Aside from enabling debt consolidation, balance transfer cards allow a 0% APR introductory period. These won’t charge interest for several months, so you can fully direct repayments into your principal debt.

Benefits of Debt Consolidation

Having several debts can be complicated to manage due to their individual terms and conditions. Debt consolidation might help by letting you deal with just one repayment plan instead. 

Even better, you may choose among the three methods we’ve mentioned for combining debts. 

You’re likely to find an option that closely suits your financial situation.

Balance transfer credit cards are especially advantageous as they allow you to tackle your debt without interest in the way. You may take this as an opportunity to repay your debts sooner. 

In addition, there are debt consolidation options that are designed for specific kinds of debts. For instance, the government and private companies have distinct options for consolidating student loans.

What are the Risks of Debt Consolidation?

You may choose from fixed-rates and variable-rates when selecting the terms of your debt consolidation. 

No matter what happens, your consolidation loan’s fixed interest rate won’t change. If your debt consolidation has a variable rate, it may fluctuate due to economic conditions. You may find it difficult to manage payments if the interest rate keeps changing.

What Are The Risks of Debt Consolidation

Remember that debt consolidation is still an unpaid balance you must repay. 

Failure to do so may damage your credit, ruin your finances, and jeopardize your assets. For instance, you risk your home as collateral by borrowing home equity for debt consolidation. 

Balance transfer cards will start charging interest after the intro period, so it’s best to complete payments before then.

What Does Debt Consolidation Do to your Credit Score?

Applying for debt consolidation involves your credit rating, much like most credit options. Your score determines the features of your loans, such as repayment terms. 

Your loan provider might have to perform a hard credit inquiry as part of your application. Consolidating your debts can lower your credit score in the short-term as a result.

Where Can I Get a Debt Consolidation Loan?

You can get consolidation loans from banks and credit unions. As there are many of these establishments, you’ll find various options for debt consolidation. 

These are usually trusted names in finance, so they might have stringent requirements. However, you’re likely to receive quality service from these long-standing institutions.

Where Can I Get A Debt Consolidation Loan

On the other hand, you can join the digital age of loans with online debt consolidation. There are myriad options on the internet, and they have pros and cons opposite to traditional counterparts. 

Online lenders follow fewer regulations, so some of them may be fraudsters and scammers. 

Although, they typically have more lenient requirements, and they usually send funds faster than conventional lenders.

Remember to search for all available options before borrowing for debt consolidation. Explore the many options from traditional and online lenders. 

You’re more likely to find a suitable loan offer by having several options. What’s more, you may miss out on better deals if you settle for an option hastily.

Final Thoughts

Debt consolidation can facilitate your debt payoff, so you can start your financial goals sooner. It’s difficult to save money if you allocate huge portions to multiple debts. 

Consolidation may help you replace the confusing loan terms with a simpler loan. You may even use your home equity or a balance transfer card, and there are types intended for specific debts.

You may try other debt reduction strategies aside from consolidation. We’ve discussed debt relief earlier, and how it can deduct from your loan amounts. 

You can also consult a credit counseling agency for their debt management program. In addition, you can follow specific ways of do-it-yourself debt payoff like debt snowball and avalanche.

Nevertheless, the best way to pay off debts is proper money management. 

Minimize your expenditures to have extra money, so you can complete payments faster. You may take a part-time job to earn more for debt payoff. 

For more help, you can consult a credit counselor, or check free personal finance tips online.

Learn More About Debt Consolidation

Is it smart to consolidate debt?

Your experience with consolidating unpaid balances will depend on your financial situation. Plan your debt payoff thoroughly before combining your debts. 

Do consolidation loans hurt your credit?

Yes, applying for consolidation loans can reduce your credit rating temporarily. However, it may help you boost your score in the long run.

What is the smartest way to consolidate debt?

The results of consolidating debts depend on your financial situation and the kinds of unpaid balances you have. You will have to find the wise choice yourself.

Why debt consolidation is a bad idea?

Debt consolidation can be a bad idea if you didn’t plan it beforehand. You may have accepted unfavorable loan terms, or your financial problems need other solutions. Please check for alternatives, so you can find the best one for you.

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