Debt consolidation is an often-misunderstood form of managing and eliminating your debts. The industry is rife with companies that over-promise, misrepresent and underdeliver the work they do. However, there are also many reputable debt consolidation companies that offer a valuable service to their customers.
We’ve compiled a list of the top ten most frequently asked questions about debt consolidation to help you make informed decisions when dealing with debt.
1. How does debt consolidation work?
With a debt consolidation loan, you work with a lender to take out a new personal loan that is large enough to pay off all your debts at once. The interest rate is usually lower than the average of your current debts, which means lower monthly payments. Once you pay them off, the only debt payment you have to focus on is the new loan. In other words, you’ve consolidated your debt.
Debt consolidation offers an attractive way for individuals to manage and pay off debt from multiple creditors. Instead of making multiple payments with various interest rates to a bunch of different creditors, you just need to keep track of a single payment. That makes it easier to pay your bills and reduces your chance of missing a payment and falling behind.
2. How do you know if you need debt consolidation?
While debt consolidation is an effective way to pay off debt, it isn’t for everyone. So, how do you know if debt consolidation is right for you?
Debt consolidation makes sense if you owe money to several creditors. It should be enough debt that you struggle keeping up with payments but not so much that you would never qualify for a personal loan.
Credit card debt is well-suited for debt consolidation. It is all too common for people to run up multiple credit card bills without realizing it. Your main credit card, your emergency credit card, cards from different stores – each balance can get out of hand. If you aren’t careful, dealing with all these different payments can become a nightmare. In this case, debt consolidation might be right for you.
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3. What are the pros and cons of debt consolidation?
Here are some basic pros and cons to help to guide your decision.
Pros
Debt consolidation helps you to stand back and take a breath. By consolidating your payments into one, you will have a much easier time managing your finances and strategizing how to pay off your debt.
In the short term, you could lower your interest rate and end up paying less each month — keeping more money in your pocket. In the long term, you could save thousands!
When you are juggling minimum payments, it can feel like you aren’t making progress toward becoming debt free. With debt consolidation, as long as you keep up with your payments, you have a clear path toward paying off your debt.
Cons
It can be difficult to qualify for a debt consolidation loan if you have bad credit. Potential lenders look to your credit score to determine if you are a risk. If they don’t like what they see, they won’t approve your loan application and you will be back to square one.
Debt consolidation is also a means to an end, not a solution in itself. Instead of paying off your current debt, you are simply making it easier to handle. If you can’t get your financial house in order and stop using credit, you could run your credit cards back up, remain heavily indebted to the creditor of your new loan and be worse off than when you started.
4. What’s the difference between an unsecured loan and a secured loan?
Debt consolidation loans come in two ways: as an unsecured and a secured loan.
With unsecured loans, the lender is enabling you to borrow based on your creditworthiness. They look at your credit score and financial history to determine if you are a good candidate to pay off your loan. The lower your credit score, the higher your interest rate.
With secured loans, the lender isn’t quite so certain. Perhaps your credit history isn’t perfect, or they see something in your financial picture that gives them a reason to pause. As a result, they require that you “secure” the loan by putting up a piece of collateral, like your car or home. If you can’t keep up with your payments, they will take the collateral instead. This ensures that they will get something out of the deal.
Secured loans could be considered riskier due to the collateral requirements. If you can’t keep up with your payments for whatever reason, you could end up much worse off than you were before. The good news is that they usually come with lower interest rates.
5. Can debt consolidation save me money?
It is possible to save money on your monthly payments if the interest rate is less on your new loan. Consolidating all your debt into one payment can also make your payment more manageable with less chance of missing a payment. You will want to make sure the new single monthly payment is affordable.
6. Is debt consolidation guaranteed to work?
There are very few guarantees in life, and consolidating your debt is no exception. It is up to you to hold back on overspending, establish better spending habits moving forward and remain debt free.
An alarmingly large proportion of individuals use debt consolidation to make managing their debt easier. But once all their credit is freed up, they can’t help themselves from running it right back up again.
7. What are the options for people with bad credit?
Debt Relief and debt settlement are popular options and alternatives to debt consolidation. If you have a minimum of $10,000 in unsecured debt, National Debt Relief can create an affordable plan that significantly reduces the amount you owe and helps you pay it off in as little as 24-48 months.
8. What’s the difference between a debt consolidation loan and debt management?
With debt management, you aren’t borrowing money to manage your debt. Instead, you are working with an expert to create a plan to become debt free.
Debt management often takes the form of credit counseling. In this instance, a credit counselor works with you to strategize the best way to pay off your debts. They often work with your creditors to restructure or reduce your debt. Or they might just help you get a better handle on everything.
This process works best for people who are financially capable of tackling their debts but don’t know how. While it requires discipline and motivation, it is often highly effective.
9. What’s the difference between a debt consolidation loan and debt settlement?
With debt settlement, your goal is to get your creditors to accept less than the total amount of your debt as repayment. In other words, you offer them some level of reimbursement and then ask them to “settle” the rest of your account to a $0 balance.
While you can try settling debt on your own, it is much easier to let a professional debt settlement company do the work for you. Debt experts know how to approach creditors and negotiate favorable outcomes on your behalf. The good ones will also offer support throughout the process.
Why would your creditors accept less than what is owed? Basically, to ensure that they get paid something instead of nothing.
You often stop making payments to your creditors and instead make payments to a savings account managed by either you or your debt settlement company.
As the funds build up, the expert negotiates with your creditors. The goal is to offer them a reduced lump sum instead of the full repayment of your debt. Some creditors are happy to get something while others rule out any type of negotiation.
10. How do you identify a trustworthy debt consolidation company?
First, trust your gut. If it seems like they are making promises that are too good to be true, trying to move you through the sales process too quickly or refusing to divulge information about what they will do, you should quickly move on to another option.
Second, do your research. Google the company and see if there have been any legal actions or negative reports against them. Pay special attention to ratings and reviews from independent third parties like the Better Business Bureau and from satisfied customers. These objective sources often paint a clear picture of what to expect.
