How Do I Consolidate My Debt?

If you have made a commitment to improve your financial situation by paying off your debt, you may be thinking, “I need to figure out how to consolidate my debt.”

Consolidating your debt will help you to pay off your debts in a faster, more effective manner, making it a good option for many individuals who are facing financial woes. In this article, we’ll explore how debt consolidation works, along with the benefits of seeking out debt consolidation assistance.

How Does Debt Consolidation Assistance Work?

how do i consolidate my debt

Debt Consolidation Assistance is Available

“What is debt consolidation assistance and how do I consolidate my debt?” — it’s a fairly common question. Debt consolidation is a fairly straightforward concept.

Through a debt consolidation assistance program, the debtor typically obtains a loan in an amount that’s sufficient to pay off all of their credit cards and other high-interest rate debts. The various credit card balances and debts are all paid off, and the borrower is left with one single loan, which has a lower interest rate.

This single loan with a lower interest rate has a few different benefits. Firstly, the debts are paid off sooner, which means the debtor pays significantly less by way of interest. In addition, the borrower enjoys a lower interest rate, so the amount expended each month can be significantly lowered.

And a debt consolidation program or loan won’t just enable you to save money; it’s also more convenient, since the individual only needs to make one monthly payment. So this serves to improve the individual’s credit since they’ll avoid late payments due to accidental oversight. 

Secured Debts vs. Unsecured Debts

Debt consolidation is ideal for individuals who have high-interest unsecured debts, like credit cards. Unsecured debts are more apt to have high interest rates, because there’s no collateral involved, thereby making the debt a bit more high-risk for the lender. Therefore, lenders off-set this risk by charging higher interest rates on unsecured debts.

The worse an individual’s credit score, the more you’ll pay on interest due to the perceived higher risk associated with lending to someone with a lower credit rating.

Secured debts are different. Secured debts allow the borrower to offer up some form of collateral, which lessens the risk to the lender. For instance, a mortgage or a car loan are good examples of secured debts. In these equations, the borrower offers up collateral — a property, in the case of a mortgage and a vehicle in the case of a car loan. If the debtor fails to pay the lender, the lender has the option of moving forward to collect the collateral by repossessing a car or foreclosing on a home.

The lender can then recover some of its funds by selling the home, vehicle or other collateral. This means the lender faces significantly lower risk on secured debts and loans, so they can charge a much lower interest rate to the borrower.

So how does this apply to debt consolidation assistance? Ideally, the debtor will take out a secured consolidation loan to pay off high-interest unsecured debts. Though there are a few alternative debt consolidation options, so individuals can select a course of action that will work with their current financial situation.

How Do I Consolidate My Debt: Options for Debt Consolidation

There are a few different options for debt consolidation. An individual’s eligibility for a particular option will vary according to the type of debts they’re seeking to consolidate and their credit history.

One option is to take out a consolidation loan. Consolidation loans are provided specifically for the purpose of paying off high-interest unsecured loans. The monthly payments for the consolidation loan take the place of multiple payments to various credit card companies and other high-interest lenders.

The downside of the consolidation loan is that it requires taking out another debt! This can take time to get approval and you must have fairly decent credit in order to get approval. It’s also important to note that this debt will be secured, so if you fail to pay, you risk losing your home or other collateral to the lender.

The second option entails transferring multiple high-interest credit card balances to a credit card that offers a lower interest rate. You will enjoy savings since you’re paying less by way of interest and you’ll enjoy a bit more convenience, since you’ll have fewer payments to tend to each month.

This option is a bit less-than-ideal due to the fact that most cards charge a balance transfer fee and even a low-interest credit card is apt to have an interest rate that’s higher than a consolidation loan or other secured debt. That said, not everyone is eligible to take out a consolidation loan, so this option is a nice alternative that can still result in significant savings, especially in the long term.

Another option: a debt consolidation assistance program. These programs — also known as debt elimination programs or debt management programs — are typically operated by non-profit groups that specialize in financial management.

These programs are not true debt consolidation in the strictest sense. The program staff simply contact the credit card companies to negotiate a lower interest rate. Then, you make a single monthly payment to the debt consolidation assistance program, which in turn, disburses the funds to pay your bills.

While there are savings in terms of interest and there is added convenience, these programs do charge a fee. So individuals who are skilled in negotiation may opt to negotiate a lower interest rate on their own. This can be a good option for individuals who don’t mind making monthly payments to multiple credit card companies. For some, it’s simply more cost effective for the individual to manage their debt independently.

For those who say, “I have secured debts. How do I consolidate my debts? Will consolidation work for me?” it’s important to note that consolidation may not be a viable, realistic option. If most of your debts are secured debts with low interest, consolidation may not provide any real benefit.

Before pursuing debt consolidation assistance, a consolidation loan, or balance transfers, it’s important to sit down to do the math. Examine interest rates, balance transfer fees, debt program fees and so forth to determine whether consolidation will result in savings for your unique financial situation.