What is Debt Consolidation?

 
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Most Americans have some form of debt. For anyone struggling with debt, or simply wanting to organize debt, debt consolidation may be a good option. Debt consolidation is the process of transferring multiple smaller debts (usually accompanied by high interest rates) to a larger form of debt which is accompanied by lower interest rates. Before seeking out debt consolidation it may be help to know the ins-and-outs of the process along with the pros and cons of debt consolidation.

Who Should Seek Debt Consolidation?

Debt Consolidation generally works best for those who/whose:

  • Have a Balanced Debt to Income Ratio-A good candidate for debt consolidation, will have debt that does not equal more than fifty percent of their household income.
  • Already Have Good Financial Habits- Debt consolidation works best for those who already have a good grasp of their finances and debt- they just need a smarter way of paying it off.
  • Can Get A Good Interest Rate – This is an important factor to pay attention to- as it is an essential part of debt consolidation. Finding a new, low interest loan or credit is key, and one may only get that with a good credit score.

How to Go About Debt Consolidation

There are primarily two ways to seek debt consolidation:

1.    Through A Credit Card

Many credit card lenders offer their customers a zero percentage interest rate for the first year or for a few months after the credit card account is first opened. For many people seeking debt consolidation, this is the perfect opportunity to transfer debt onto a new card and take advantage of paying it off with no interest attached.

Credit cards come with all kinds of amounts, interest rates, and perks. Before choosing the one to use for debt consolidation it is important to find a good balance between those three factors (for your individual financial needs).

2.    Through A Loan

For those who do not have the credentials for a new credit card they may want to consider taking out a loan for debt consolidation. Unlike credit cards, loans can be made available for a variety of financial histories. In addition, a person can take out a secured loan from the things they have such as a home, a car.  Even a 401k loan works.

Before considering a loan for debt consolidation, it is important to look at; if the amount will cover all debt, the amount of interest that the loan carries, and what possible consequences there may be for borrowing.

No matter what route a person chooses to take to consolidate debt, it is important to look around at several credit card and loan lenders before deciding one to go with. Additionally it may be helpful to come up with a budget, allocating a certain amount to the new loan being taken on (to prevent from getting into even more debt).

The Pros and Cons of Debt Consolidation

Like many other things in the financial world- debt consolidation comes with its own sets of pros and cons. Pay attention and consider these before pursuing this form of debt organization:

Pros of Debt Consolidation

  • Time Extensions– Can give a person more time to pay back debt.
  • Lower Monthly Payments– Debt consolidation may lower the amount due each month.
  • Can Help Eliminate Debt quickly- – Can help pay off debt faster- with little to no interest.
  • Options– There are several ways to go about it.

Cons of Debt Consolidation

  • Credit History Having an Impact– Not everyone may be able to get a good interest rate (It is dependent on credit history).
  • Potential Loss– If a secure loan is taken out and not paid- a person may lose whatever they secured the loan with (usually a car or home)
  • May Keep a Person in Debt– Debt Consolidation will not build good financial habits– and for those who don’t have them already have them, debt consolidation may actually work against them.
  • Higher Cost– For some people extending the length of time to pay back debt, may end up costing them more in the long run.

Debt consolidation does work for many Americans. However, before thinking about debt consolidation carefully go over the pros and cons and seriously think about whether or not it would be a good option for you, and your individual financial situation.

Debt Consolidation is the process of organizing smaller, high interest debts into one single low interest form of debt. By doing this a person can extend the amount of time they have to pay back debt, lower the interest they are paying, and make managing debt a little bit easier. For those considering debt consolidation there are two primary ways to go about it: thorough a credit card or through a loan. Whatever route a person takes to pursue this process, it is important to find a lender that will offer a low interest rate and will work with their unique financial circumstances.

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2Based on consumers who received a loan from February 2002 to October 2018.

3Application processes could take five (5) minutes to complete. Upon completion, a conditional approval may be given pending review of documentation. Funding time is based on the time from final approval following receipt and review of all required documents and signing, prior to 5PM PST on a business day.

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