What is debt consolidation?
Debt consolidation involves combining multiple unsecured debts into one bill, which can be helpful if you’re overwhelmed by an assortment of monthly payments. You can consolidate a variety of debts, including credit cards, payday and personal loans, utility bills, and medical expenses.
So instead of having to send a separate payment to each creditor or collector every month, you’d make just one. This can help eliminate missed or late payments and ensure that you’re addressing all your debts.
Debt consolidation loans can be a great option, not only because it streamlines monthly payments, but also because, in many situations, you may get a reduced interest rate and lower total monthly payment.
There are many options to consider when deciding to consolidate your debt, some of which work better in different situations.
A word to the wise, though: Debt consolidation loans aren’t for everyone struggling with debt. Determining which method will benefit you the most will involve some homework and some calculations … or a visit to a debt counselor.
How does debt consolidation work?
Debt consolidation can take many forms, including a personal loan, a balance-transfer credit card, a home equity line of credit (HELOC) and a debt management plan, among others.
No matter what strategy suits you best, the idea is the same: Lump together all or most of your debts into a single payment as a way to save money, simplify your finances … or both.
For example, if you have multiple high-interest credit card debts and outstanding medical bills, you may want to take out a personal loan to repay those debts. Then you can focus on repaying that personal loan, which requires just one monthly payment and, ideally, has a lower interest rate than what you were paying across multiple debts (it may not have a lower rate, but it’s in your best interest to find the lowest one you can).
The specifics of how debt consolidation works will vary by the type of debt you have and the method you choose.
What debts can I consolidate?
Any type of personal debt can be consolidated. This includes but is not limited to:
Does it make sense to consolidate your debt?
While consolidating debt certainly has merits, it is not the right choice for every individual. Above all, the approach has to match the need and the comfort level of the borrower.
A good rule of thumb is: debt consolidation is not a good option if your debt is more than 50 percent of your income. It is also not a fit if you do not have a consistent source of income that more than covers your monthly payment.
Finally, bad credit can keep you from getting a good interest rate, which negates the main purpose of a debt consolidation loan. But obtaining debt consolidation loans with bad credit is possible if you fall into that category.
Click here to view the best debt consolidation loans for 2018