There are many ways to consolidate your debts. You can choose a consolidation program that targets certain types of loans, such as student loans or revolving credit accounts, or look for a single program that allows you to consolidate different types of debt. You need to find a program with an affordable monthly payment to maximize the benefits gained from debt consolidation.
Debt Management Plan
Don't confuse a debt management plans with a debt consolidation program. A debt management plan is a financial program that might be suggested by one or more credit counselors. You should be able to get free information about a program before you enroll or provide information about your credit accounts, says the Federal Trade Commission. When you look for debt consolidation facts online, remember to make this important distinction between debt management, in which a service makes payments to all of your creditors, and a debt consolidation plan, in which a lender rolls all of your debts into a single debt with a standard monthly payment.
Low Interest Rate
Another advantage of rolling debts into one account is that you can get a single interest rate for all of the outstanding debts. You also get to make one monthly payment. Shop around for debt consolidation programs and find the one with the lowest interest rate. Compare programs to see how the monthly payment compares to your budget and how many monthly payments it will take you, even at a low interest rate, to satisfy the loan terms. If you aren't careful, you might pay more money for a lower-interest-rate loan with a longer repayment period than a higher-interest-rate-loan with a shorter repayment period. Calculate the total you will pay over the duration of a program.
Compare Programs
You also want to determine if some loans you want to consolidate might not be eligible for a program. For example, if you want to consolidate student loans, you won't be able to consolidate federal student loans with private student loans. You might also find that a federal loan consolidation will only result in a fixed interest rate, whereas consolidators of private loans might allow you to reduce your payment by securing a lower rate when the prime rate goes down.
Potential Damage to Credit
If you select debt management or debt settlement programs as an alternative to debt consolidation, you could lower your credit score. You will have to stop making payments and then rely on the program to negotiate new terms with each creditor. However, you may get the benefit of lower interest rates because some reputable programs have agreements with credit card companies. You have to ensure that you will actually get out of debt faster and save money by choosing debt management over debt consolidation.
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