Debt Consolidation

If you carry debts with multiple creditors at a variety of interest rates, then debt consolidation can help you save money on those debts and simplify repayment.

 

Debt consolidation is a way to unify all your debt into a single large payment. It may be a good option if you have trouble keeping track of multiple credit cards and how much you owe each month. If done right, it can even help you pay off your debts faster.

Debt Consolidation Simplied

Debt consolidation might be right for you if your total debt is no greater than half of your current income. Likewise, your credit score must be sufficient to qualify you for a low-interest debt consolidation personal loan or a zero percent interest rate credit card. Our comprehensive tips on consolidating loans and other monthly payments may simplify the process.

In addition, we have organized multiple solutions to your money-related issues, including debt-relief programs, fixed-rate consolidation loans, direct consolidation loans for students and more.

Ultimately, you may find ways to become debt-free in a shorter time period, thereby saving you a significant amount of money in interest.

How Does Debt Consolidation Work

When you consolidate debt, you take your balances from multiple high-interest bearing debt with various creditors and roll them into a single debt with one creditor at a lower interest rate.

Your monthly payment might be lower, as well. Your debts to your former creditors would be marked as charged off on your credit reports and you would show a new credit account with your debt consolidation creditor. As long as you keep this new account in good standing, the effects of your debt consolidation will continue to have a positive effect on your credit.

There are two primary ways consumers can consolidate debt:

  • Fixed-rate personal loan – You can take out a personal loan from a bank or other creditor at a low fixed rate and use those funds to pay off all your debt. Then, you need only pay back the personal loan according to its terms.
  • Balance transfer to a zero percent interest credit card – Find a credit card with a zero percent interest rate promotional sign-up offer. The promotion must apply to balance transfers, although it is beneficial if the promotional interest rate applies to purchases, as well. Transfer all your other debts to this new card and pay the balance off in full before the promotional period expires.

Besides these two most predominant ways people consolidate debt, you can also take out a loan on your 401(k) retirement plan or your home. Beware, however, that taking out a 401(k) loan or home equity loan to consolidate debt can be risky to either your retirement or your home.

Consider all the factors before deciding to take out a new form of debt to consolidate existing debt. Make sure the choice you make is the right one for your current economic circumstances and your financial future.

Debt Consolidation Programs

Debt consolidation programs are a good option for customers who need professional help with their debts.

These programs help with unsecured debts, including credit card debt and personal loans. They may also help with home loans, private student loans from non-government lenders and tax debts from the Internal Revenue Service (IRS). A client may seek help if he or she has reached the point of delinquency or does not know how to decrease the amount of time it takes to pay back a loan.

In addition to creating a repayment plan, debt consolidation companies may help their clients lessen their loan amounts through settlement or forgiveness plans.
When choosing a debt consolidation program, it is important to take company reviews, experience and fees into consideration. Be sure to use third-party websites to check the reviews of debt-consolidation companies.

In general, it is a good sign when a company addresses negative reviews and informs the public of how it incorporates this feedback into its program.

Additionally, a company that has many years of experience may indicate the level of success you will have with its service. The fees a company charges are equally as important. To see which rates are typical and which are overly expensive, ask for quotes from a variety of debt-relief companies.

Student Loan Debt Consolidation

Student loan debt relief programs are designed to help graduates receive forgiveness on their loans.

However, certain criteria must apply. The Public Service Loan Forgiveness Program, for example, only applies to government or not-for-profit employees. Qualified applicants must also make at least 120 monthly payments while working full-time for an eligible employer.

Eligible employers include:

  • Government organizations at the federal, state, local or tribal level.
  • Not-for-profit organizations that are lawfully tax exempt.
  • Not-for-profits that are not tax exempt but provide certain public services.
  • AmeriCorps or Peace Corps.

Other options to ease your student loan debt include debt consolidation and income-driven payment plan requests. A direct consolidation loan through the U.S. Department of Education allows you to consolidate multiple loans with different interest rates into one, fixed-rate loan.

The application for a direct consolidation loan through the federal department of student aid does not require a fee.

An income driven repayment plan reduces the amount you must pay in student loans each month, making your payment plan more feasible.

This may be a good option if a significant part of your income goes toward student loan payments each month. Different plans operated by the Department of Education include Pay as You Earn (PAYE), Revised Pay as You Earn (REPAYE), Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR).

Debt Consolidation Loan

A debt consolidation loan has several pros. First, it combines all your debt so that you only have to make one payment each month.

This may help you visualize your progress and may relieve the pressure of remembering to make all your payments on time. Second, you will qualify for a fixed rate if you have good credit. A fixed rate is an interest rate that does not increase over time.

Though fixed rates may be higher than changing rates to start, a fluctuating rate may increase dramatically over time. In addition, it may be easier to budget your debt if you always know how much you owe in interest.

You may not qualify for debt consolidation loans with bad credit or without proof that your cash flow consistently goes toward your payments. You may also not be eligible if the total amount that you owe exceeds 50 percent of your income.

Credit Card Debt Consolidation

The best way to consolidate credit card debt may vary depending on your needs. The more common methods of debt consolidation include a balance-transfer credit card and a debt consolidation loan, though you may also purchase a home-equity loan or a 401(k) loan.

A balance-transfer credit card puts all your debt into one location, making it easier to manage your payments and track your progress. If you have good credit, you may qualify for an introductory 0 percent interest rate. If you pay off your debt while the 0 percent interest is in place, which is often called a promotional period, you will not incur any more interest on your card.

Home-equity loans and 401(k) loans involve borrowing against your own assets and are typically seen as riskier consolidation methods. A home-equity loan allows you to borrow against your home by naming your home as a collateral. A 401(k) loan allows you to borrow against your retirement funds.

Debt Relief Programs

If you need help finding credit card debt relief, you may consider a debt relief program.

This type of program may assist you in finding the best solutions available, developing a plan and negotiating with your lenders to see if you can settle your debt.

In general, you are required to make direct deposits of each month into a savings account. When you have made enough substantial deposits into the account, this money is used to negotiate a settlement with your lenders.

The best way to pay off credit card debt is to create a plan of action. Keep track of what you owe so that you know how long it will take to pay off all your debt. If you establish the date that you want to become debt-free, you may then work backwards and figure out the size of the payments that you must make each month. An online debt calculator may help you easily perform these calculations.

How to Get Out of Debt

Paying off debt requires diligence and consistency. To ensure that you make payments on time and do not become delinquent, set aside a certain amount of money each month as soon as you receive your paycheck.

Then, make sure this money is immediately submitted to your lender so that you do not use it for other matters. Additionally, be mindful of how debt affects your credit score so that you do not fall into a debt spiral. A debt spiral occurs when you cannot make payments on your loans or credit cards and continually purchase more loans or credit cards, which give you a quick solution but further increase your debt.

Benefits of Debt Consolidation

As already mentioned, one of the best and most obvious benefits of debt consolidation is that you will presumably pay a much lower interest rate on your new consolidated debt. That is not the only benefit of debt consolidation, however.

Debt consolidation also makes it easier for you to succeed in paying off your debt sooner and for less money while having a positive impact on your credit rating. Instead of multiple payments to make and due dates to consider, you only have one.

This can greatly simplify your finances and prevent you from defaulting or making late payments on your existing debt.

Debt consolidation can also help you pay off your combined debt faster.

Since you will not be paying so much money toward interest each month on different credit accounts, you can apply more of the payment you make each month toward paying down the principal. When you pay down principal, you pay off the debt sooner.

As you pay down principal, the interest calculated on your new balances due are consistently lower, so you pay less for that debt.

 

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