People who have never tried debt consolidation may have some idea of why it's a helpful process for people struggling to tread water in a sea of bills. Simply put: debt consolidation involves the use lender money to settle outstanding debt and refinance payments on it at a lower interest rate that's affordable or over a longer term to lower monthly payments. Consolidation is better than bankruptcy; however, it can negatively impact how lenders view the consumer going forward.
For those new to the process and considering debt relief, here are 10 things to know about debt consolidation:
1. Debt consolidation does not make the debt go away
Think of debt consolidation as a means of putting all your bills in a single envelope with a single monthly payment that's handled by a new lender. Use LendingTree's debt consolidation calculator to get a handle on monthly payments.
2. You're in charge of monitoring your credit
The new lender that has offered a consolidation loan or cash-out refinancing pays off the original debtors, but it's up to the consumer to view any ongoing account statements from the original accounts and ensure that ongoing credit reports/history note the payments are made on time and/or discharged. You could be ambushed by late fees and penalties.
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3. Cash-out refinancing has its plusses
Rolling credit card debt into a loan backed by equity can cut the interest rate to shreds and interest on it can be tax deductible.
4. Cash-out refinancing has its minuses
On the negative side, the balance on credit card transfers cannot be discharged by bankruptcy, leaving your home vulnerable if you can't make the new payments.
5. Consolidation programs come packaged with consumer credit counseling
The idea is that the borrower doesn't continue to make grave mistakes with their finances once they're restored and on the road to recovery.
6. Not all credit counseling/debt-relief agencies are tip-top
The Federal Trade Commission (FTC) reports of scam artists who ask for money in advance to secure a loan. The Department of Justice maintains its own list of approved credit counseling agencies.
7. Debt relief companies must disclose prices, terms and consequences
Some settlement programs require borrowers to deposit payments up to three years before settling the previous debts. Some creditors may not want to negotiate for a settlement on the balance. Read the company's small print on your obligations, how much the program costs, and how long it takes to see results.
8. Even defaulted federal student loans can be consolidated
Consolidated student loans can add time and lower the monthly payments, but be sure the total price on the loan is lower. And know that once consolidated, the student loan is no longer eligible for loan forgiveness programs.
9. Consolidated loans can have variable rates
Consumer beware: A consolidation lender may offer a low initial "teaser" rate on a loan, adjusting the rate upwards after the introductory period has passed. Locking in a fixed interest rate on a consolidation product is one of the best ways of planning, budgeting and paying off the loan.
10. Consider retirement loan options
Some consumers may be able to borrow against a 401k or similar retirement account to consolidate debts. The upside: Paperwork is easy. The downside: If you can't repay your account, you may be hit with stiff fines and taxes.
If you're wondering if debt consolidation can help you, explore our resource center here.