Debt consolidation can help you start the journey toward a smoother financial future by using a single low-interest rate loan to pay off multiple debts. Debt consolidation may take the stress out of having to manage and prioritize payments to multiple lenders, could save you money and help you to get out of debt faster. A low-interest rate personal loan is just one of the ways you can consolidate debt, take control of your finances and ease the burden of past spending.
Debt Consolidation Process
Getting a handle of your debt by consolidating is simple but be sure to choose a debt consolidation solution thoughtfully. When considering options, look for solutions that could help you save money and pay off your debt quickly without negatively impacting your credit.
4 things to consider before you decide which debt consolidation solution is right for you.
- Take inventory of your debt and interest rates to determine how much you’ll need to borrow.
- Know your financial situation. Take a look at your income and monthly expenses to determine how much you’ll be able to afford towards a monthly consolidation payment.
- Research debt consolidation options such as debt management programs, home equity loans, credit card balance transfers and personal loan debt consolidation.
- If a personal debt consolidation loan is right for you, compare lenders and choose one that offers the best interest rates and terms to meet your financial needs.
There are many ways to consolidate and get out of debt but keep in mind debt consolidation, debt management, and debt settlement are very different. Each has its advantages and disadvantages — which we explore below.
What’s the difference?
Debt Consolidation versus Debt Settlement and Debt Management
Understanding the difference between debt consolidation, debt settlement, and debt management can help you make an educated decision on the solution that’s best for your financial future.
If you choose to apply and are approved for a debt consolidation loan, you’ll receive a lump sum to pay off your balances — combining your debts into one loan with a single payment, interest rate, and loan term.
Debt settlement — sometimes referred to as debt relief — is the process of paying off balances by negotiating with creditors to settle a debt for less than what’s owed. In exchange, your outstanding balance will be considered paid in full. While paying less than what you owe may sound appealing, debt settlement could have negative repercussions.
Debt management programs help you negotiate with current creditors to come up with a way to help you repay your outstanding balances without lowering the balance you owe. Unlike debt consolidation, your balances will not be combined under one loan. Instead, you’ll make a monthly payment to a credit counseling service which negotiates on your behalf to lower your interest rate and establish a repayment period.
The Pros and Cons
Debt Consolidation vs. Debt Settlement & Debt Management
|Debt Consolidation||Debt Settlement / Debt Relief||Debt Management|
|The Pros||You may be able to consolidate all outstanding balances, resulting in one monthly payment. Debt consolidation loans may offer lower interest rates. You could potentially pay off debt quicker. You can avoid credit damage if you manage your consolidation loan responsibly and don’t run up additional debt.||Lowers your debt amount. May help you avoid bankruptcy and charge-off.||Credit counseling agencies negotiate with your creditors to reduce interest and limit the cost of fees. Financial counseling may be provided to help you avoid future financial difficulties. One monthly payment is made to the counseling service who disburses payments for you.|
|The Cons||You may be subjected to fees if you make a late payment. A good credit score will be required to ensure a low interest rate.||No guarantee that your creditors will negotiate. It could negatively impact your credit. Debt settlement companies may charge a fee. If you reach a settlement agreement, the amount that’s forgiven on your loan could be considered taxable income.||You could risk losing the agreement if you miss a payment to the credit counseling service. Some credit card issuers may revoke charging privileges. Debt management programs may hurt your credit rating if the lender reports that you’re not repaying the loan as originally planned.|
How Does A Debt Consolidation Loan Work?
If you’re considering making a change to improve your financial health by consolidating high-interest rate balances, a debt consolidation loan might be the right path for you. The solution is simple — apply for a loan with a lender that meets your financial needs, use the funds to pay off multiple creditors and start paying off your debt with one monthly payment.
Are you a good candidate for a Consolidation Loan?
In order to be successful with debt consolidation, ask yourself the following questions:
- How much debt do you have and how does it compare to your income?
- What’s your credit score and is it good enough to qualify for a low-interest rate?
- Are you disciplined enough to pay back your loan without running up additional debt?
- Will you be able to afford monthly payments on a consolidation loan?
Benefits of Debt Consolidation Loans
A debt consolidation loan may help you get your financial life back on track with:
- Lower interest rates to help you save money.
- An easier way to repay debt with just one monthly payment.
- Potential improvement to your credit rating.
If you’re ready to get a better handle on your debt, a debt consolidation loan could be the perfect solution to get you on the path to a brighter financial future. Take a look at a few of these resources to see if a debt consolidation loan could work for you: