How to Consolidate Your Debt

Debt can be difficult for anyone to tackle. It can be especially difficult for households with limited incomes and resources.

Residents who do not have a lot of experience with budgeting, do not know how to do so effectively or are simply make too little to budget can feel even more overwhelmed. However, there are several ways for those struggling with debt to turn their financial situation around.

One way that residents can find relief is debt consolidation. This can be an effective method especially for those who have undergone credit counseling and reviewed all of their other options. A benefit to this method of debt management is the reduction in monthly payments. However, there are some drawbacks to this solution as well. Continue reading the sections below to determine if debt consolidation is the right decision for you.

How to Define Debt Consolidation

The process of debt consolidation involves a resident who is in debt purchasing a new loan to pay off most, or all, if his or her debts. This method allows debtors to combine multiple debts and loans into one large loan. By doing this, residents can obtain better repayment terms including a lower interest rate and monthly payments. However, it is important for debtors attracted to this option to be aware of the drawbacks.

Debtors who frequently only pay the minimum on their monthly loan payments will likely pay more over the life of the loan due to the increased repayment period. Although they are required to pay less each month, interest still adds up.

Moreover, certain debt consolidation companies may offer secure loans to customers. This means that debtors must provide certain assets as collateral such as their house or car in order to receive a loan. Residents who do not repay their loan will have these assets repossessed.

Learn About Debt Consolidation Types

Typically, consolidated loans are offered with reduced monthly payments, interest rates or both. Applicants with good credit may be able to obtain a personal loan or unsecured loan. These can come with set payments and conditions over a pre-determined amount of time.

There are two types of debt consolidation loans. One type is a secured loan, the other is unsecured. A secured loan is backed by collateral in the form of assets while unsecured loans do not require such collateral but may have higher interest rates. While both loans can be difficult to obtain, both typically have lower fixed rates than most credit cards.

There are several options for those who want to get a secured or unsecured loan. The following are some common options:

  • Credit card balance transfer— Under this method, debtors combine multiple loans under and card balances onto one card that has a low interest rate. Applicants with credit may be able to achieve a balance transfer at low or no cost.
  • Home equity loan— This is known as a second mortgage or home-equity loan installment. This method utilizes the equity of a home as collateral. Many residents who own a home can qualify for this type of loan. However, failure to make payments on this loan can result in foreclosure.
  • Consolidating student loans—There are a few options for residents struggling with student loan debt. The federal government allows debtors to consolidate these loans at no cost. Other student loan lenders may offer refinancing options and private lenders may permit consolidation as well but for a fee.

When Debt Consolidation Might be the Right Decision

Consolidating debt is a good option for some residents but not for others. Some financial circumstances make debt consolidation the best option. Residents who have multiple debts that total more than $10,000 with high interest rates or have difficulty making monthly payments can benefit the most from debt consolidation.

However, residents who have smaller amount of debts or who are not confident that they can pay off their debts within five years may not be ideal candidates for debt consolidation. To successfully consolidate debt, residents’ debts must meet the following requirements:

  • The debtor is able to make consistent and timely payments.
  • A resident’s total debt is no more than 50 percent of his or her annual income.
  • The debtor is eligible for a low or no-interest consolidation loan or credit card.

Learn About the Disadvantages of Debt Consolidation

Residents should carefully evaluate their options before moving forward with debt consolidation as there are several risks and drawbacks to the process. Any loans comes with risks and it is important to be aware of them in order to make an informed decision. Different loans have different terms and conditions. Understanding the components of different loans can help residents with debt select the loan option that they can best follow. The following are common risks of loans that debtors should be aware of:

  • Damage to credit score – At first, a debt consolidation loan can cause damage to a resident’s credit scores. However, making consistent payments on the loan can increase the credit score over time. Although, debtors who miss a payment will likely see an additional decrease in their credit scores.
  • Lengthy loan terms – The length of debt consolidation loan is usually much longer than the original loans. Thus, consolidated loans take longer to pay off.
  • Potential to lose assets – When debtors have to sign up for a secured loan, they risk losing certain assets if they fail to make payments. For instance, residents may have to use their home as collateral. They risk foreclosure if they can no longer make payments on their loan. While debtors can also seek an unsecured loan, they will find that it is more difficult to find.
  • No special terms – Loans such as student loans have certain special terms or benefits. For instance, students are often permitted to defer payments while enrolled in school or during a time of financial hardship. However, a consolidated loan that include these schools loans will remove these benefits.

Learn About Credit Counseling Agencies

Personal finances and debt can be difficult to manage. However, numerous options are available for residents who are looking for relief from debt.

Although, not all debt relief options are suitable for debtors. Some are only beneficial for those in certain financial circumstances.

To find the best option for dealing with debt, residents should research their options thoroughly. One helpful resource for those who do not have much experience with finance is a credit counseling agency. Debtors who need debt relief but do want to do anything drastic can begin with getting advice from a credit counseling agency. Credit counselors provide assistance in numerous ways including advising clients on how to best manage their finances as well as providing budgeting tips. Many agencies also offer educational materials for free, obtain credit report and score copies and create debt management plans.

Going to a credit counseling agency is a good first step to achieve debit relief and improving a financial situation. Often, these services are available for free at low costs and can be found within non-profit organizations. For some, going to a credit counselor may be enough to get them on the right track with their finances while others will need to take additional steps to reduce their debts. Continue reading below to learn about credit counseling and determine if it can be a beneficial option.

What are credit counseling agencies?

There are a number of services offered by credit counseling offices that residents in debt can take advantage of. In addition, credit counselors offer assistance for credit building and personal finances. The purpose of these services is to help clients understand what they can do about their debts and how they can improve their financial situation. Usually, credit counselors will create a personalized financial plan with their clients that targets their specific needs and goals.

Different types of agencies and organizations offer credit counseling. These include religious organizations, credit unions and non-profit agencies. Most agencies offer similar services for clients. One of these services is budgeting assistance. This is often done during an initial session with a credit counselor. During this step, the creditor assess the client’s income, expenses and goals before creating budget or advising additional steps. Furthermore, residents undergoing bankruptcy can meet with a credit counselor as well. In fact, debtors considering bankruptcy are required to attend counseling prior to filing. Additionally, residents can obtain counseling for specific finances such as student loans or housing. With student loan counseling, debtors can learn about different options for managing their debts, forgiveness options, repayment plans and consolidation. On the other hand, those seeking housing advice can learn about the different aspects of home finance management such as reverse mortgages, pre-purchases and mortgage counseling. Last, credit counselors create debt management plans that help reduce monthly payments.

Learn About Debt Management Plans

Debt management plans are frequently recommended by credit counselors to residents who are struggling to make payments. A plan of this kind helps debtors save time and money in paying their debts. However, debt management plans are not right for everyone. These plans are most suitable for debtors who have a moderate amount of credit card debt and will not need to take drastic actions to get out of it.

Unfortunately, a debt management plan cannot work for medical or student loans debts. These plans are similar to debt consolidation as both programs result in one monthly debt payment instead of several. Unlike with debt consolidation, credit counseling agencies contact creditors directly to reduce interest rates. However, clients are required to commit to a payment that can last three to five years.

Once a debtors agrees to their payment plan, they will contribute monthly payments to the credit counseling agency. Then, the agency sends the payment to the creditors. Making payments this way allows clients to have pay lower interest rates and only have to pay one monthly payment instead of several. Thus, debtors will have an easier time making their payments and sticking to the plan.

Committing to a debt management plan is not ideal for everyone. A plan like this is best for residents who are able to make monthly payments and do not need open a line of credit to support their payment plan. Moreover, there are few fees involved in debt management plans. Usually, clients are not required to pay more than $50 per month. However, a credit counselor can determine if a debt management plan is the right option.

How to Select a Credit Counseling Agency

It is usually easier to find a credit counseling agency than organizations that perform other types of financial services. Reliable, non-profit credit counseling agencies are accredited by the National Foundation for Credit Counseling. Accredited organizations hire certified counselors who can provide professional assistance. Clients can obtain educational information and numerous counseling services for a low cost or even for free.

The first appointment with a counselor is typically the consultation and is usually free of charge. Thus, there is little risk for debtors to begin using the service. However, not all residents who have outstanding debts need to visit a credit counselor. Debtors with the following circumstances should consider seeking a credit counselor:

  • They are considering bankruptcy.
  • They are looking for assistance with their finances.
  • They are struggling to make payments on their credit cards and other debts.
  • They have been denied an unsecured loan.

Residents are encouraged to verify with their state attorney general or local Federal Trade Commission (FTC) about any negative comments, reviews or complaints filed against a given agency. It is important to ensure that a company is certified and accredited before working with a credit counselor. It is important to avoid agencies that charge for educational materials without providing services as well.  In addition, a reputable agency is typically also a non-profit organization.

There are often various ways to contact and obtain access to a credit counseling agency. Some offer initial consultations to be conducted by phone or online while others only offer in-person meetings. Prices vary by agency, state and service.