If you have many outstanding debts that you are finding difficult to pay off, then you may want to consider debt consolidation. But what is debt consolidation?
American households currently have over $16 trillion in debt. Most people are looking for ways to manage that debt.
If you’re trying to pay off debt, have you considered debt consolidation?
Let’s go through the top things you need to know about, “what is debt consolidation”? And what options might work for your needs.
What is Debt Consolidation?
Debt consolidation is when you combine a few different debts into a single loan or payment. This is often done to simplify the repayment.
It usually involves taking out a new loan or credit line to pay off your existing debts, such as outstanding card balances, bills from medical procedures, personal loans, or other high-interest debt.
By consolidating these debts, the borrower can often benefit from a lower interest rate, which can reduce the interest paid over the life of the loan.
It is necessary to note that debt consolidation does not eliminate debt but rather combines it into a single payment. It is also important to be very cautious of predatory lenders and high-interest loans that may actually worsen your financial situation.
Types of Debt Consolidation
There are several ways to consolidate debt. So, you need to understand the different types before you jump in.
One type of debt consolidation is called balance transfer cards. This form of debt consolidation involves transferring older credit card balances to a newer credit card with a lower interest rate, often with an introductory period of 0% interest.
However, this option typically requires good credit and may include fees. Personal loans involve taking out a new loan to pay off multiple debts, such as credit cards or medical bills. Personal loans often have a fixed interest rate and can offer lower rates than credit cards.
However, the interest rate and terms of the loan may depend on your credit score and financial history. So, if you’re looking into taking out a personal loan, make sure you do plenty of research and figure out if it’s beneficial for your needs.
There are also loans for home equity or lines of credit. You’ll borrow against the equity you currently have in your home to pay off debt. Home equity loans often offer a lower interest rate than credit cards or personal loans, but they also put your home at risk if you are unable to make payments.
Or, you could try debt management plans. These involve working with a credit counseling agency to create a budget and payment plan for your debts.
The agency may negotiate with your creditors to lower interest rates and consolidate your payments into one monthly payment. However, this option may have fees and can impact your credit score.
Debt Consolidation: Now You Know
Now that you understand, what is debt consolidation? You’ll hopefully be on your way to making the right decision for your needs.
Do you need more help managing your finances? We’ve got you covered. Take a scroll through a few of our other helpful posts.