Debt Consolidation

October 28, 2020

For some consumers, debt consolidation provides an organized and effective way to deal with multiple debts. The process combines what someone owes on credit cards, high-interest loans, and other bills into one monthly payment. Through obtaining a lower interest rate on all these outstanding balances rolled into one, debt consolidation may help get one’s financial affairs in order and save money.

Methods of Debt Consolidation

The type of debt consolidation a person qualifies for depends on factors such as his credit, employment income, and how much he owes. Some popular debt consolidation strategies include:

• Obtain a credit card with a low- (or no-) interest introductory period that allows transfer of other debts onto this card. Then, pay the balance off in full before the promotional interest rate timeframe ends.
• Seek a low, fixed-rate debt consolidation loan to pay off your existing debt. Then, pay the loan back in installments over an agreed-upon period of time.
• Take out a home equity loan to pay off debt. The interest rate tends to be lower than that of credit cards, and interest paid on the home equity loan may be tax-deductible.
• Get a loan from your 401(k) by borrowing against your retirement savings. Use the money to pay off accumulated debt, and repay the loan at a lower rate for a fixed period of time.

Considerations about Debt Consolidation

People should not rush into decisions about debt consolidation. Experts especially urge consumers to think carefully before choosing a method that puts their house or their retirement account on the line. Failure to pay could have disastrous future consequences. Advisors typically favor the first two debt consolidation strategies listed above as initial courses of action.

Options abound for individuals seeking debt consolidation. Organizations such as credit card companies, banks, credit unions, mortgage companies, and private lenders are all possibilities. They will ask questions to get an idea of your financial situation and work with you to figure out what terms they can present for your situation.

Debt consolidation offers tend to be the most favorable for someone with a good credit score, a consistent source of income, and a “reasonable” amount of debt (often defined as total debt that’s less than 40 percent of one’s gross income, excluding mortgage). Individuals so overwhelmed by debt that even lower payments will fail to help them make headway may need to look for other means of reducing debt.

Since conditions vary considerably for debt consolidation, shop around for the best deal. Some debt consolidation services charge initial and monthly fees, so watch how those expenses figure into the overall picture. Also, be certain you understand the information presented and the repayment schedule before signing on the dotted line.

Debt consolidation may help you save money on interest, lower your monthly payments, and pay down debt faster. It does not, however, “forgive” debt, nor does it address the issues that led to debt concerns in the first place. People opting for debt consolidation may want to simultaneously get counseling or do research on how to keep debt in check in order to prevent landing in the same situation again.