Every month, you’re inundated with a bunch of bills of various amounts and due dates. Just keeping track of everything has gotten to be too much. Plus, the interest rates are costing you an arm and a leg. Don’t lose hope, though: debt consolidation could be the financial strategy to save you. Here’s how debt consolidation works.
What is Debt Consolidation?
At its essence, debt consolidation is the process of rolling multiple debts into a single payment. This saves you money, since, ostensibly, you’re getting a better interest rate. If you aren’t, then consolidation isn’t worth your while.
Consolidation also allows you to clear your debts faster. A key benefit of debt consolidation is that it streamlines bill paying, since you’ll have just a single monthly payment of which to keep track.
What Does Consolidation Cover?
Mostly credit card obligations, although it also typically handles personal loans and medical bills. Overall, consolidation covers unsecured debts – those not moored to collateral assets such as a house or car.
Consolidation Through a Personal Loan
You’ll need a least good credit, but consolidation loans can be had through a traditional bank, credit union, or online lender. The way in which credit unions are structured often gives applicants more wiggle room, although if you’re a customer of good standing with your bank, you should also try there.
With online lenders, they can give you some idea of the kind of interest rate for which you’re eligible by using only a “soft” credit pull – one that doesn’t hurt your credit.
Once your debts are paid off with the new loan, you’ve just got that one monthly payment – one that’s now lower, since you have a better interest rate.
Consolidation Through a Balance Transfer Card
You’ll need good credit here too, but if you can get a balance transfer card, you can shift your high-interest cards onto it. Transfer cards offer interest rates as low as zero percent for an introductory period. So, you must be able to pay off your old cards before the old rate kicks back in. Before going this route, you should also be mindful of potential transfer fees.
Consolidation Through a Home Equity Loan
You’re certain get a good rate with this kind of debt consolidation. Why? Because the loan is attached to your crib, which you could lose if you miss payments. Having said that, if you can get such a loan, which is secured by the equity you have in your home, you can use the cash to erase existing obligations.
Consolidation Through Cash-Out Mortgage Refinance
This approach is when you refinance your mortgage for more than what you owe, leaving you with funds to pay off other debts. Here, too, because your loan is linked to a secured mortgage, your rate will probably be markedly lower than what you’re paying on current debts.
Am I a Good Candidate for Consolidation?
You might be if your spending is in check. You don’t want to end up in the same position or worse. Debt consolidation may also be for you if your cash flow is enough to cover all your debt payments, and if you’re devoted to erasing all your debt. In addition, the strategy may be for you if you’re fine with paying off your loans over a longer period.
Overall, now that you know how debt consolidation works, you can progress with full knowledge and understanding of this tried-and-true financial strategy. Whether it’s a loan credit, transfer card or some other means of consolidation, you can now knowledgeably pick the approach that’s right for you.