Debt consolidation is a strategy to combine multiple loans into a single loan. It’s like refinancing – you get a new loan and use it to pay off your existing debt.
When you consolidate loans, you are not really paying off debt. Instead, you will swap your debt for another loan. You still owe the same amount as you did before consolidation, but you can get certain benefits from combining these loans and moving them elsewhere.
Example: Suppose you borrow two credit cards. Each card charges 18% per annum and you owe $1,500 for each card. To consolidate your debt, you can get a loan of $3,000 to pay off these cards (ideally, your new loan will have a much lower interest rate).
Simply moving money around does nothing. But there are ways to consolidate debt and get ahead.
Save money: The best reason for consolidating loans is to save money, and the easiest way to do this is to borrow at a lower interest rate. For example, credit cards often charge relatively high interest rates, making it difficult to pay off your debt. If you take out a loan with a lower interest rate, you will save on interest costs. This means that every dollar you invest in your debt will be directed towards reducing your loan balance. Ultimately, this should help you pay off your debts faster.
Simplification: Consolidating multiple loans for a single payment can also make it easier to stay on top of your payments. You won’t save money by simply going for one payment, but if it helps you avoid missing payments and late payments, go for it. In fact, your required monthly payment may be higher after consolidation – which is good.
A larger payment (combined with lower interest rates each month) means you will pay off your debts faster. You won’t get anywhere if you just make the minimum payments on your credit cards.
If you can save money and not create additional problems, debt consolidation is a great idea. The key is to find a loan that really lowers your interest expenses.
Consolidation, like everything in life, is associated with pros and cons. Watch out for unintended consequences.
Debt consolidation shouldn’t have a major impact on your credit. However, this may result in some movement in your credit scores.
Over time, there is a chance that you will actually see your credit scores improve – if you don’t collect debt again. You will switch from (possibly maximized) credit card revolving debt to debt repayment, and making regular payments on these loans can improve your credit.
To consolidate debt, you need to apply for a new loan and use the proceeds from that loan to pay off existing debts. Shop among various lenders and different types of lenders or get a debt consolidation loan.
Consolidation with bad credit: If you have less perfect credit, you have fewer options and need to be careful. It’s harder to get approval and the world of debt consolidation is known for its fraudulent practices. For your safety, you can use a referral service online. Some of them will require you to provide collateral or use a cosigner, and you will have to evaluate the advantages and disadvantages of these strategies.
You can also run advertising programs for debt consolidation companies. What they do offer is a form of debt management or debt counseling – which isn’t always a bad thing. Take a close look at what they promise, see if you can do it yourself, and don’t pay steep fees if you don’t get paid for your money.
Consolidation is used not only in the credit and financial environment but also in medicine and science. Translated from Latin, “consolidation” is the “unification” or “strengthening” of something. Speaking about the economic and credit environment, consolidation in this case will mean the consolidation of documents or regulations.