The Basics of Debt Consolidation

If you’re like millions of Americans, you’re probably holding some sort of debt balance in one or more accounts; whether it be credit cards, a car payment, school loans, or even medical bills.

Debt is a tricky thing, and if left unchecked unpaid balances can pile up, burying you in a financial hole, and negatively impacting that ever important credit score.

When you have outstanding balances or open accounts, a good method for solving your debt problem is debt consolidation.

What Is It?

Let’s say you have two credit cards you’ve defaulted on, a personal loan, or other outstanding balances. You just can’t seem to get a grip on paying each individual account every month on time. Debt consolidation offers a simple solution: combining all of your debt into one lump sum, which you borrow in the form of a loan, and you make monthly payments to that one party instead of several. Often a single payment each month is simpler and more manageable for those in considerable debt. A consolidation loan also offers a lower interest rate than traditional loans (after all, the idea is to get you out of debt) but this is entirely up to the lender. Often the interest rate is based on your credit score.

How Do I Start?

If you’re looking into debt consolidation, a good place to start is your credit score. Your credit score is a measure or your merit as a borrower. The score tracks late payments, defaults, collections, and balances to give you a score generally between three hundred and eight hundred and fifty, with anything above seven hundred viewed as a “good” score.

If you’re applying for a loan or a new credit card, the lender will pull your score to see if you are able to make your payments. This also determines the interest rate on your loan or credit card. Generally the better your credit score, the lower interest rate you’ll be offered.

You Mean I Have To Borrow More Money?

Often the word “loan” is enough to scare off someone in considerable debt. They don’t want to add more debt or have more payments. A debt consolidation loan is similar to a regular personal loan, except that most debt consolidation plans have considerably lower interest rates.

Your credit card debt also accrues more interest the longer you leave your debt unpaid. This is what causes many credit card users to get out of hand. They forget about interest rates, only to find that they are further in the hole than they first thought.

Credit Counseling VS. Consolidation

Another option available to consumers is credit counseling. Credit counseling services which education on how to manage bills and budget to get out of debt. These programs teach you how to live within your means, and not to borrow money for extra things, and when you must borrow money, such as for a car or house, how to shop for the best loan options and budget your income to effectively make your payments each month.

I Want A Loan, Where Do I Go?

If you’re looking to start the consolidation process, you’ll need to search for a lender. There are many consolidation options, and a wealth of information to be found on a site like Get Out of Debt.

Each lender will have their own interest rates and lending amounts. So, be sure to research beforehand and determine how much debt you have accumulated, how much you need to borrow, and what the terms and conditions are of the loan you’re signing for.

Generally, a good consolidation agent will walk through your debt with you and guide you to the right loan amount. Make sure when you’re applying for your loan you bring any relevant paperwork. You can obtain a copy of your credit report from Transunion, Equifax, or Experian.

Pay On Time

While a consolidation loan can be an incredible asset, it can also become a detriment if you aren’t making your payments on time. Remember that you’re still responsible for the terms of the loan and the amount you borrowed. A consolidation loan is a chance to expel that excess debt once and for all, and should not be taken lightly, especially if you owe a considerable amount of money.

Consolidation Is Not For Everyone

If you owe a particularly high amount to any one lender or have a somewhat abysmal credit score, debt consolidation may not work for you. It is still a loan, and subject to interest rates and the discretion of the lender. If you’re having trouble even making your payments on time for your loans or cards, perhaps credit counseling or debt settlement is a better option. Again, this is entirely dependent on the situation, type, amount, and delinquency of your debts.

Moving Forward

Debt consolidation can be a new beginning for those in debt. It offers an efficient and manageable solution which can add more flexibility and stability to your wallet and spending habits. Debt can seem to pile up and cause great anxiety and stress, and finding a solution can help ease that anxiety and create a new era in your financial history. Not to mention, once all of that debt is paid off, you can begin fixing your credit score, opening up new opportunities and putting you in good standing with future lenders.