Debt Consolidation can make life easier
If you’re overwhelmed by debt, you’re not alone. There are some excellent choices out there that can help you get your life back on track. Rolling multiple debts into a single monthly payment can save you money and make your debt easier to manage.
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- A proceeding in a federal court in which a borrower who owes more than his or her assets, can relieve the debts by transferring his or her assets to a... <a href='/glossary/what-is-bankruptcy' title='See the full definition of Bankruptcy'>read more</a>
- Consolidating Debt
- Replacing several debts or loans by transferring the balances to a single loan or line of credit, usually at a better rate. (Debt consolidation loans... <a href='/glossary/what-is-consolidating-debt' title='See the full definition of Consolidating Debt'>read more</a>
- What is Debt?
- Money that is owed to an individual or institution. Credit card balances, mortgages, auto loans and personal loans are all examples of debt. <a href='/glossary/what-is-debt' title='See the full definition of What is Debt?'>read more</a>
- Debt Consolidation
- Debt consolidation is a process by which several debts are replaced by one debt. The idea is to simplify repayment and hopefully make it more... <a href='/glossary/what-is-debt-consolidation' title='See the full definition of Debt Consolidation'>read more</a>
- What is a Debt Consolidation Loan?
- A single loan that replaces several other loans, making it easier to manage the debt. The new loan should have more favorable terms than the accounts... <a href='/glossary/what-is-debt-consolidation-loan' title='See the full definition of What is a Debt Consolidation Loan?'>read more</a>
- What is Debt-to-Income Ratio?
- Debt-to-income ratio, also known as DTI, is the relationship between a consumer’s monthly debt payments and income. This may be referred to as DTI,... <a href='/glossary/what-is-debt-to-income-ratio-dti' title='See the full definition of What is Debt-to-Income Ratio?'>read more</a>
- Failing to repay a debt as agreed. Defaulting on an obligation can have serious consequences, including but not limited to lawsuits, eviction,... <a href='/glossary/what-is-default' title='See the full definition of Default'>read more</a>
- A legal remedy for non-payment of a mortgage debt. The lender takes and sells the property to cover amounts owed. Any remaining proceeds are returned... <a href='/glossary/what-is-foreclosure' title='See the full definition of Foreclosure'>read more</a>
- Negative Amortization
- Negative amortization occurs when your monthly payments are not large enough to cover all the interest due on the loan. The unpaid interest is added... <a href='/glossary/what-is-negative-amortization' title='See the full definition of Negative Amortization'>read more</a>
- Revolving Debt
- Open-ended accounts, usually with variable interest rates, pre-determined credit limits and payments that are calculated as a percentage of the unpaid... <a href='/glossary/what-is-revolving-debt' title='See the full definition of Revolving Debt'>read more</a>
- Secured Debt
- A secured debt is money borrowed that is guaranteed (or secured) by the borrower’s funds or assets and held by the lender in an interest-bearing... <a href='/glossary/what-is-secured-debt' title='See the full definition of Secured Debt'>read more</a>
- Unsecured Debt
- Unsecured debt is debt without collateral to back the loan in case of default. <a href='/glossary/what-is-unsecured-debt' title='See the full definition of Unsecured Debt'>read more</a>
- Upside-Down Loan
- A loan secured by a collateral that has depreciated in market value and is worth less than the balance owed. For example, if you owe $5,000 on a car... <a href='/glossary/what-is-upside-down-loan' title='See the full definition of Upside-Down Loan'>read more</a>
Frequently Asked Questions›
- How does debt consolidation lower my monthly payments?
There are two ways to lower your monthly payments. First, if you extend the repayment period, the monthly expense drops. Many debt consolidation loans have longer terms than the accounts they replace -- for example, you might have 20 years to pay off a home equity loan. Stretching out that repayment lowers your monthly payment, as you can see in this example:
The second way of lowering your monthly expense is to secure a consolidation loan with a lower interest rate. Lower interest rates mean lower payments, assuming that you don't accelerate your payoff schedule:
- Are there any drawbacks to debt consolidation?
Yes. There are potential problems with debt consolidation, and it's only fair to warn you about them.
Number one, keep in mind that the majority of people who consolidate their debts run them back up again. So if you aren't very sure that you won't leave your credit cards alone and refrain from running up balances, you probably shouldn’t take out a debt consolidation loan.
Second, if you choose to consolidate debt with a home equity loan, understand that you will be replacing unsecured debt (which can be discharged in a bankruptcy) with a loan secured by your home (which means you can lose your home if you don't make your payments).
Third, understand that debt consolidation can cost you money. You might lower your payment by extending the amount of time it takes to pay off your debts, but you could end up paying more interest -- even if the interest rate is lower, taking longer to repay an account can cause more interest to accrue. That's not necessarily bad, if lowering the payment is more important to you than paying less interest -- but you should be aware of what the tradeoffs are.
- When is the best time to consolidate my debt?
As soon as possible. The longer you stay with your current high-interest loan, the longer it will take to pay off the principal. This means your overall cost will be higher and you’ll be paying way too much interest.
- Do I have to be a homeowner to consolidate my debts?
Nope. There are several ways to consolidate debts. You can take advantage of balance transfer offers from credit card companies. Many of them offer low fixed rates for an introductory period; if you use that time to pay down your debt as much as possible, you can save substantial amounts.
You may qualify for a personal loan. Personal loans, also called signature loans or unsecured loans, can be gotten with fixed interest rates, hopefully lower than what you're currently paying.
Of course, the lowest interest rates usually come with home equity loans because they are secured by a house, which makes them less risky for lenders.
- Is debt consolidation the same as debt management or debt settlement?
Absolutely not. With a debt management plan (DMP), you pay a lump sum each month to a counseling service or debt management company and they divide it up and send payments to your creditors. Part of this service usually involves negotiating lower payments, decreased interest rates, or removal of penalties. This may help you pay less to get rid of your debt.
Debt settlement is another matter. Debt settlement companies may take payments from you as well, but they don't forward them to your creditors. Instead, they keep your payments until they have a lump sum that they try to get your creditors to accept as full payment for your debts. It's a pretty risky and expensive strategy, and you'll also owe taxes on any forgiven debt.
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