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This article was last updated Oct 09, 2017, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.
Most American’s have debt, some more than others – especially if student loans have been taken out. As of March 2013, consumer indebtedness was at $11.23 trillion. Non-housing debt is currently at $11 billion for auto loans, $20 billion for student loans and $19 billion for credit card balances.
With over 30 million American’s having debt with a collection agency ($909 billion of delinquent debt), it’s important we understand how to get out of debt. One practice is debt consolidation. That’s the act of combining all debt into one payment with the goal of paying on a lower interest rate. You will end up saving more this way in the long run and possibly save you from late payments. Debt consolidation is good for those who are having trouble making payments on their various debts and only work as long as you make payments and cut your bad habits that got you where you are to begin with.
Here are a few ways to consolidate and manage debt.
Debt Consolidation Programs
They’re everywhere! You work with a consultant at a company who will actively try to consolidate your loans while also providing tips and advice on how to maintain and manage payments, narrowing your dependence on credit cards and loans in general. You are typically locked into a form of contract, about 2-5 years in length. Payments are made to the consultant or the company and they negotiate with your debtors and send your payments into them. Watch out for faulty programs though by staying on top of your progress and documenting your payment history. Some have hidden fees similar to the hidden fees in the terms of your credit card.
Debt Consolidation Loans
These are loans you take out that traditionally offer a lower interest rate than what your currently paying (that’s the point, right?), allowing you to save money in the long run and actively pay down your debts that are all managed in one place. These don’t necessarily hurt your credit score, but it does take a few points off since it requires a hard credit check. Options include loans from:
- Mortgage Lenders – Known as a home equity line of credit loan (HELOC), these are provided on the basis that your home is used as collateral. These will generally have a better interest rate than other loan options, but you’ve a lot more to lose; your home.
- Credit Card Companies – This works similar to a loan because you transfer other credit card debts to a new card, traditionally with a 0% introductory interest rate (usually between 6-15 months), which lowers the overall amount you would be spending over time. This is best achieved if the balances are paid off before the intro rate ends and if you miss one payment, you lose your great interest rate, making the balance transfer pointless to begin with. Check out this post from earlier this year to better understand the process.
- Peer-to-Peer Lenders – Like all other options, the interest rate will be lower than what you’re currently paying and you aren’t likely to find any hidden fees anywhere. The length of the unsecured loan tends to be shorter and more beneficial in comparison to a loan through a bank. Keep in mind that these companies have to make a profit somewhere, so this is more costly than being disciplined enough to manage and negotiate payments yourself.
- Banks – Through a traditional bank, you can obtain a personal loan, business loan, mortgage loan, etc. This should be used more as a last resort only because the interest rates will be slightly lower, not significantly lower, than what you’re already paying.
This is a program through a company, like a debt consolidation program, that ends collection calls and allows you to negotiate with your creditors. Creditors agree to accept less than you owe, usually for one (sometimes 2 or 3) lump-sum-payment in return. The main difference between a debt settlement and debt consolidation is that you stop paying your bills and instead pay the settlement company. With this option, your credit score will take a large dip in the short-run, but it’s a step-up from filing bankruptcy.
Why Debt Consolidation Fails
Many people are always on the lookout for additional lines of credit. That is NOT what a debt consolidation program should be used for or you’re going to find yourself in a bigger bind than before you sought a consolidation solution. The top reasons why debt consolidation fails:
- You use your new line of credit from a loan to pay off your cards, but then keep spending on your cards.
- You pay more interest over time, making the consolidation pointless to begin with.
- Use an expensive consolidation service that charges not-so-hidden and hidden fees.
- You look at it as a solution to your debts by not learning anything from your mistakes, and going right back to making unnecessary charges and following reckless payment schedule.
Remember, debt consolidation is only beneficial if you have a hard time managing all your payments, need a lower interest rate to avoid late fees and getting farther into debt, and you aren't using the loan as an additional line of credit. Later this week we will go over the best debt consolidation programs out there and consolidating student loans.
*Editorial Note: This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed bythe credit card issuer. This site may be compensated through the credit card issuer Affiliate Program.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.