What You Need to Know About Debt Consolidation

What You Need to Know About Debt Consolidation

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Consolidating your debt can save you money.

If you are in debt, you may be looking for ways to reduce the amount you owe in a bid to retire your debt completely. Paying off two or more loans can be time-consuming as well as emotionally taxing as you try to track how much you owe and to whom. One way to get pay off your debt faster is through debt consolidation, a process where you combine two or more loans or debt obligations to one monthly payment. Let’s take a look at debt consolidation, its significance and how you can make it work for you.

Debt Consolidation Essentials

There are two ways that you can consolidate debt. The first option is with a debt consolidation service. The second is a do-it-yourself plan.

With a debt consolidation service, you’ll need to find the services of a trusted and experienced professional to help you manage your finances. These people may or may not be licensed — check with your state’s consumer affairs department to see if licensing is required. Also, you must be aware that fees are charged and sometimes the fees can add to your debt burden instead of helping to relieve the problem.

You can also consolidate debt yourself by seeking out a new loan that will be large enough to cover your current debt and offer an interest rate that is lower than the rates you currently pay. The interest rate you get is of utmost importance as it will lower the amount you must pay each month and allow you to pay down your debt faster. No consolidation loan should be sought that doesn’t help you get out of debt faster.

Fixed Interest Rates

Another advantage of a debt consolidation loan is that you can secure one with a fixed interest rate. Sure, a variable rate loan could come in with an interest rate that is lower in the shore term, but it can always go up and without warning. Some lenders offer a low, teaser rate and then dramatically raise interest rates on unpaid balances after six or 12 months. At this point you’re stuck unless you can pay off the loan, seek refinancing or consolidate yet again.

Debt consolidation loans can be had through your bank. Given that this loan represents unsecured debt, your rate will be higher than a loan that is secured, and that is backed up by material property such as your home, a car or some other asset. You should also have a clean credit history, meaning you will need to pull your credit reports ad obtain your credit score. Your banker will need to see proof of employment — bring with you your W2s — your income — the last two years of your tax filings — and other documentation. It certainly helps to have good credit to obtain a debt consolidation loan and also to have a good paying job.

Final Thoughts

A debt consolidation loan can help you get out of debt, but if handled wrongly can make things worse or delay the day of financial reckoning. Once you consolidate your debt, you must avoid using the credit cards that got you into trouble in the first place. Consider filing these cards away or, if the temptation to use them again is too strong, close each account out. Closing your accounts will lower your credit score temporarily, but it will do much less damage than going deeper into debt and falling behind on your monthly payments.

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Categories: Consumer Financing