Whenever someone asks about what is debt consolidation, he must know that this method is actually a method used to eliminate credit card debt. The 2016 survey by the Federal Reserve showed the average amount of debt by each age group:
Under 35: $67,400
75 and up: $34,500
If you have taken out private loans for school or moving to a different place, consolidating these loans can make your debt load manageable. You are basically getting rid of high-interest credit card bills, which in turn allow you to repay the balance on time and earlier.
Did you also know that the total amount in credit cards owed by U.S. people is $444 BILLION??
The numbers are astonishing.
Read on and learn more about how debt consolidation can help you avoid falling into a financial rut.
Debt Consolidation: Best Definition & How it Works in 2020
Definition of Debt Consolidation and How it works
As far as the definition of debt consolidation is concerned, it means that you opt to pay a lower monthly payment, instead of paying your entire balance off. In other words, you combine several unsecured debts payday loans, credit cards, medical bills into one monthly bill.
You may be thinking about why there’s a requirement to pay only 1 creditor.
The reason is that in case you decide to manage multiple loans differently, you would not understand how to manage your finances so that you can pay it back. Thus, when you choose the consolidation, you can follow your financial plan well.
As far as your credit rating is concerned, the debt consolidation definition would look to how your credit score affects your debt-consolidation choice. Therefore, your credit rating is a factor that decides the advantages of debt consolidation.
When you are seeking a loan, you have to keep in mind that this loan may increase your credit score. So, if you find that it doesn’t bring any positive consequences on your credit rating, you must decide to stop this alternative. Otherwise, you could lose the same amount of money you’re going to get in interest charges.
Thus, in debt consolidation, you are paying off several debts. But you have to be aware that the higher your debt, the less interest rate you’d pay. In addition, you may have to pay taxes, penalties, and the interest rate you pay isn’t necessarily your own.
The very best way to increase your score is to ensure that you are able to repay the debts within a predetermined period of time, meaning that you must have a fantastic repayment plan. Thus, to improve your score, you will have to find out a repayment plan that you can afford and will allow you to save money.
If you have bad credit, you can still consolidate and opt for debt consolidation. However, you will have to pay a little more as a result of the interest rate you pay each month.
Things to know about Debt Consolidation
There are some advantages of debt consolidation.
The consolidation definition starts with debt consolidation for education or home.
- The advantage of consolidating education is that you save money in interest, which you can place toward your other debt, such as home equity loans.
- Consolidating student loans can also be a step toward bankruptcy protection. Even should you not end up filing for bankruptcy, having bad credit can make it hard for credit in the future. With student loans, credit agencies have an inclination to keep tabs on your history and your ability to pay back the loan.
- Home equity loans may have some benefits in case you have problems repaying your invoices. These loans usually have high-interest rates and need regular monthly payments. They also entail the purchase of a home, a costly move for the majority of people. As a consequence, consolidating this type of loan can help lower monthly payments and supply you with a way to rebuild your credit.
- Credit cards are another thing to be careful about if you will need to pay off all your debt. Not only can they be inconvenient, but they also drain your finances each month. Use a credit card responsibly and see how much you can accumulate before you have to pull on the plastic.
- In the interest of saving yourself by paying numerous invoices every month, the number one advantage is convenience.
- In the pursuit of saving your credit rating, a disadvantage of debt consolidation is that you may be forced to rekindle the same loan each year if you are unable to make your monthly payments on time. If you are living paycheck to paycheck, this can really hurt your credit score.
- A negative impact of having many loans would be that it can lead to bankruptcy. Debt consolidation doesn’t erase your debt, nor does it free you from the consequences of past mistakes. However, having all of your debts consolidated into a monthly payment makes it easier to pay down debt and avoid bankruptcy.
- Even a decreased interest rate isn’t necessarily an assurance when you consolidate.
- Debt consolidation doesn’t mean debt elimination.
- Debt consolidation is a refinanced loan using extended repayment terms.
- Extended repayment terms mean you will be in debt longer.
- Debt consolidation is distinct from debt settlement. If not done right, you can lose thousands of dollars.
- Use a credit card ONLY if you can really pay off your debts over time.
- Some debt settlement companies suck. They don’t really allow you to slay enormous sums of debt. In fact, you may end up paying more and staying with debt longer because of consolidation if you pick the wrong companies.
If you consolidate, there isn’t any guarantee that your interest rate is likely to be much lower.
Your debt consolidation interest rate is normally put at the discretion of the creditor or creditor and is based on your past payment behavior and credit rating.
Even in the event that you are eligible for consolidating with low interest, then there isn’t any guarantee that the rate will always be low.
Keep in mind that the reason you choose to consolidate loans would be because they save you money and allow you to take out one loan without having to worry about multiple bills each month.
Realistic Video about Debt Consolidation by Dave Ramsey: Is it Worth it?
I just love Dave Ramsey because he is genuine and helping millions around the world getting their finances into place. In this video, he covers the topic of debt consolidation and if it’s worth it. Watch until the end and Subscribe to his Channel.
Best Debt Consolidation Companies
In the event, you decide to consolidate your debt, pick the right company. Here is a list of the best debt consolidation companies around.
- Best for individuals with $10,000 or more in unsecured debt: Curadebt
- Best for Bad Credit score: OneMain Financial.
- Best for Borrowers with a High-Credit Co-Signer: FreedomPlus.
- Best for a Debt-Free Plan: Payoff.
- Best for Educated Borrowers & Co-Borrower Option: SoFi.
- Best for Good Credit: Discover Personal Loans.
- Best for Low-Interest Rates: Best Egg.
- Best Marketplace: Lending Club.
- Best Lender for No Fees Except Late Fees: Discover
- Best Lender for Funds Available As Soon As The Same Day: LightStream
- Best Lender for $2,000 Minimum Loan Amount: Prosper
- Best for customer service: Marcus by Goldman Sachs.
For people who want to utilize debt consolidation, you need to be realistic about the long-term goals you would like to accomplish.
The debt consolidation method entails a large amount of effort and an understanding of your financial position. But, it’s a way of reducing debt, which can help your future finances.
A final point about the debt consolidation definition is that there are several different alternatives that you can utilize to make payments easier to handle. By employing assistance from a credit counselor, you can decrease your monthly payments and maximize the advantages of debt consolidation.
Take some time to research different providers and compare rates. Using one service can wind up costing you money over time. By looking at various choices, you will have the knowledge necessary to carefully choose the very best debt consolidation plan for your situation.