You’ve swung and missed at solving your debt woes yourself, and now realize you need professional help. You’re considering debt consolidation but aren’t sure how the process works. Here’s some information about the financial strategy to help you decide whether it’s right for you.
How Debt Consolidation Works
The main idea behind debt consolidation is to roll your unsecured debts into a single loan or balance transfer with an interest rate and monthly payment that’s lower than what you’re paying on current debts. This strategy can save you cash and allow you to get out of debt faster.
Another benefit to loan consolidation is that you will improve your credit utilization score by using less of your available credit. This will potentially improve your credit score as well. You need to have your spending under control, however, to avoid racking up new charges that could put you right back in a bad situation.
How To Choose The Right Debt Consolidation Loan
When it comes to debt consolidation, there’s no one-size-fits-all. A debt consolidation loan is a type of personal loan that’s available through online lenders, banks, and credit unions. When shopping around, consider available loan terms, fees, and interest rates. Oftentimes, you can get “prequalified” through online lenders that use a soft credit check to check your eligibility. While prequalification does not equate to approval, you can use the process to get an idea of terms for which you’re likely eligible.
Credit Card Balance Transfer
This is when you open a new credit card with a low introductory or promotional interest rate and transfer your existing balances to the new card. This type of consolidation also gives you one payment to focus on and can lower your monthly credit card payment. It can also lower the overall cost of your debt by dropping the interest rate – sometimes to 0% for a limited time.
Student Loan Consolidation
This process melds multiple federal student loans into one government-backed loan. You can lower and streamline monthly payments, and you may be eligible for borrower protections such as Public Service Loan Forgiveness. You can take advantage of this forgiveness plan in conjunction with student loan refinancing, which entails mixing several loans into one private loan.
Home Equity Loan
You can take out a loan that’s secured by your equity in your home and use the one-time payment to erase or consolidate current debts. While you must dole out interest on the whole loan amount, you will likely pay a much lower interest rate than what’s available with a debt consolidation loan because your house serves as loan collateral. The risk, of course, is that you could lose your property if you default on the loan.
Cash-Out Mortgage Refi
This is when you refinance your mortgage for more than the loan’s outstanding balance. This strategy lets you withdraw the difference and use the cash to pay off other debts. Using your mortgage, you can then roll your other debt payments into a single payment. Since the loans are combined into a secured mortgage, you will likely get an interest rate that’s way lower than what’s offered on your original debts.
What is the main idea behind debt consolidation? Now you know. Take this info and parlay it into a chance for a brighter, debt-free future.