If you feel like your debt has gotten out of control and you’re having a hard time keeping on top of everything, it may be time to consider debt consolidation.
If you’ve ever wondered “how does debt consolidation work,” we’re going to break it down for you here.
Let’s look into debt consolidation and why you should consider it.
How Does Debt Consolidation Work: An Overview
Debt consolidation is the process of taking your existing debt from different sources and combining them all into one, manageable monthly payment with a lower interest rate.
When you consolidate your debt, you still owe the same amount of debt as you did before, the difference is you’re combining it all into one monthly payment. However, consolidating your debt can help you reduce the amount of interest you owe for your loans. This means you’ll save money in the long run, while paying off your debt faster.
Different Types of Debt that can Be Consolidated
Only unsecured debt is suitable for debt consolidation. So bills like your auto loan and mortgage would not be eligible for consolidation because they are tied to collateral.
Some examples of debt that is ideal for consolidation include unsecured personal loans as well as:
- Student loans
- Credit cards
- Medical debt
- Utility bills
When is Debt Consolidation a Good Idea?
If you’re simply looking for a way to better manage your debt, consolidating it into a single payment makes sense. However, if you’re drowning in debt and can’t afford your payments, consolidation will not make it go away.
Debt consolidation is not a method for eliminating debt, just combining it. We encourage you to do the research and read about debt consolidation and the options available to you.
Common Ways to Consolidate Debt
If you’re ready to consolidate your debts there are a few different ways to do it. Some popular methods include:
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A balance transfer is a process of switching the balance of one credit card onto another with a 0% introductory rate. By switching from a card with a higher interest rate, you’ll save on the amount of interest owed on your debt, saving some money in the long run.
Home Equity Loan
If you’re a homeowner, you can use some of your home’s equity to take out a home equity loan. You would use this money to pay off your debts and then you’d be left with a single payment to pay back your home equity loan.
These loans typically come with low-interest rates so you’ll save some money in paying this back rather than your high-interest secured debt. While this is an option, it comes at the risk of losing your home if you default. Ensure you have the means to pay back this type of loan before considering it.
Debt Consolidation Loan
A fixed-rate debt consolidation loan is another option. This option includes rolling all of your debt into a personal loan that you pay back monthly.
For this to truly benefit you, the interest rate on this loan would have to be lower than that on your existing debts.
The Bottom Line
There are many different options for consolidating your debts into a single payment that’s easier for you to manage. By taking advantage of lower interest rates, you’ll end up paying less over the lifetime of the loan.
Now that we’ve answered your question, “how does debt consolidation work” check out the rest of our site for more finance and lifestyle tips.