Debt is a common issue that many people struggle with. When debt balances are high, it becomes difficult or even impossible to pay bills on time, save for the future, and enjoy the lifestyle that you otherwise could enjoy without debt. Those who are looking for a feasible solution for dealing with debt may consider debt consolidation.
Understanding Debt Consolidation
Before you make the decision to consolidate your debts, it is important to understand what debt consolidation is. Through the process of consolidating your debts, you are essentially rolling most or all of your unsecured debts into a single account. Ideally, this account will have a fixed term and a low interest rate. In many cases, this results in lower monthly debt payments and a reduction in interest charges. It can also mean an improved ability to repay the debt quickly.
Limits and Amounts
There are many types of debt consolidation loans that you can consider applying for. The loan limits and amounts are generally determined by your credit rating and income. Some loans may be for a few thousand dollars, but others may be tens of thousands of dollars. You can easily use this online loan calculator to estimate your financial needs. You can also determine how much money you could save by consolidating your debts.
What Types of Debt Consolidation Are There?
There are a few types of consolidation options you can consider. Each offers pros and cons to consider.
- Credit Card Balance Transfer. This involves transferring your debt to a single credit card. By doing so, you may take advantage of a low introductory rate for a short period of time. However, this is on a revolving term and the rate will likely escalate in a few months. Therefore, it is not the ideal option for consolidation.
- Home Equity Loan. If you have a significant amount of debt, you may consider refinancing your home. You can take equity out of the home to pay the debts off. This establishes the debt on a fixed term loan with a low interest rate. The interest is tax deductible.
- Unsecured Personal Loan. Another idea is to apply for an unsecured loan with a bank. These options may have a higher interest rate and a shorter term than a home equity loan. However, you may still enjoy a lower debt payment than you are currently paying. In addition, you may pay the debt off more quickly because of the shorter term.
How to Apply for Debt Consolidation
The steps to consolidate you debt vary based on the type of consolidation effort you decide to pursue. If you decide to consolidate debt to a single credit card, you will need to gather information. For example, you need the credit card account numbers and outstanding balances for all accounts. Then, you will need to call the credit card company that you want to transfer the debt to. Your account representative should be able to assist you with the balance transfers in a single phone call.
On the other hand, if you intend to apply for a home equity loan or an unsecured personal loan, you will first need to shop around. Find the right lender to work with. Pay close attention to the maximum loan amount available. Make sure that the loan will fully cover all of the debt you need to consolidate. In addition, focus on the interest rate and loan terms available. Use a loan calculator to estimate the amount of money you will save through each loan option.
After you have decided on a loan program you want to move forward with, you often can complete an initial loan application online. With a home equity loan, you may need to order an appraisal on the home to confirm its value. With both unsecured and home equity loans, you often need to provide tax returns, bank statements, pay stubs, and other documentation. The loan process often takes up to a few weeks to complete. Generally, you can follow up with your representative periodically to check on the status of your loan request.
In some cases, the lender may require the debt to be paid off with the loan proceeds. If this is the case, the lender may directly pay your creditors. Some may ask you to close some or all of the accounts so that you cannot make additional charges. In other cases, the lender may provide you with the loan proceeds. You will be responsible for paying your creditors off. You may also choose to close some or all accounts. After all, the last thing you want is to fall deeper into debt by charging your accounts up again.
How Does Repayment Work?
Here is one of the great things about consolidating your debts to a fixed term loan, such as an unsecured personal loan or a home equity loan. The debt will be entirely paid off when the loan term ends. For example, if you apply for an unsecured personal loan with a five-year term, you may be debt-free at the end of that term. Repayment of the loan is often established through regular monthly payments. These payments may be manual, or you can often set them up to be automatically drafted from your account.
Some lenders may even require automated payments. It is wise to review your budget and factor in the new loan payment before you apply for your loan. In many cases, a consolidation loan will lower your overall expenses, improving your budget. However, each financial situation is different, and you need to ensure that consolidating debts is the right financial move to make.
For example, if you apply for an unsecured personal loan with a five-year term, you may be debt-free at the end of that term. Repayment of the loan is often established through regular monthly payments. These payments may be manual, or you can often set them up to be automatically drafted from your account. Some lenders may even require automated payments. It is wise to review your budget and factor in the new loan payment before you apply for your loan. In many cases, a consolidation loan will lower your overall expenses, improving your budget. However, each financial situation is different, and you need to ensure that consolidating debts is the right financial move to make.
It is wise to review your budget and factor in the new loan payment before you apply for your loan. In many cases, a consolidation loan will lower your overall expenses, improving your budget. However, each financial situation is different. You need to ensure that consolidating debts is the right financial move to make.
FAQs We Know You Have
How Long Does It Take to Consolidate Debt?
Many people who are seriously in debt want to see an instant improvement in their financial situation. However, it realistically may take you years to amass your debt. As such, it is reasonable to expect it to take a few years or more to pay off the debt.
The consolidation process timeline will be dependent on the type of loan you use to consolidate the debt. For example, an unsecured personal loan may have a four to six-year term in many cases. A home equity loan, on the other hand, may have a 15 to 30-year term.
Can You Consolidate Debts If You Do Not Own a Home?
Debt consolidation is an option if you do not own a home. A home equity loan is a common way for individuals to consolidate debt. Still, you can also consider a credit card balance transfer or an unsecured personal loan. That is if you want to consolidate your outstanding debts.
How Does Debt Consolidation Result in Lower Monthly Payments?
Through a consolidation loan, you are simply transferring balances from one account to another. Your outstanding balance does not change through this process. Therefore, you may wonder how your monthly payments will be reduced.
There are two factors at play. First, when you transfer the debt to an account with a lower interest rate, you will pay less in interest each month. This directly lowers your payments. Second, when you transfer debt from a revolving term account, such as a credit card, to a fixed term account, you will lower your payments further. The longer the fixed term, the lower your payment.
Do You Need Good Credit to Consolidate Debts?
Some people who are heavily in debt do not have good credit scores. This may be from their high outstanding balances, late payments and more. If you discover that you cannot qualify for a home equity loan or an unsecured personal loan, a credit card balance transfer is still an option.
If you are currently stressed about your financial situation and you are looking for help managing your debts, consolidation may be the answer that you are looking for. Debt consolidation can provide you with lower payments and even a debt elimination plan. Consider exploring the consolidation options available to you today.