Whether your goal is to decrease your interest rate on your debt, lower your monthly payment or simplify your bills into one payment each month, debt consolidation can help. Although many credit counseling organizations offer debt consolidation services, they often charge a fee, and you can consolidate debts yourself through one of several methods.
How it Works
When you consolidate debts, you take out one large loan and use that money to pay off all the debts you are consolidating. Instead of having many monthly payments, you have just one. To determine how large your consolidation loan needs to be, add up the payoff amount for each of your current debts. These might be credit cards, personal loans, collection accounts and auto loans. You can consolidate all these types of debts.
Types of Consolidation Loans
Homeowners can take out a home equity loan to consolidate debts. These loans have lower interest rates than most other types of consumer credit. Another option is to obtain a personal loan from a bank or credit union. If you have a whole life insurance policy, you can borrow from that. If you are consolidating credit card debts, one short-term option is to open a new credit card with a low introductory interest rate and no balance transfer fee. However, the rate on the credit card will increase when the introductory period is over.
Considerations
For any type of consolidation loans, you might have trouble qualifying if your credit score has been damaged significantly. If you cannot obtain a loan on your own, you might have to seek assistance from a credit counseling organization. One of the benefits of professional help is that the counselors can advise you whether you should consolidate debt, enroll in a debt management plan or declare bankruptcy. In some cases, declaring bankruptcy can be a better solution than consolidating debt. When seeking credit counseling, research the company through the Better Business Bureau and obtain a listing of fees from the company before making an appointment.
Warning
Although debt consolidation might lower your monthly payment to provide immediate relief from your debts, you have not rid yourself of debt. You still owe the same amount as before; you just owe it to a different lender. After consolidating debts, do not use your empty credit lines as a license to overspend again. You could find yourself even deeper in debt with higher monthly payments than before. This is especially dangerous if you consolidate with a home equity loan or refinanced mortgage, because falling behind on these payments could lead to foreclosure.
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