Everything You Need to Know About Debt Consolidation Loans

By June 10, 2021 No Comments

Consumer debt in the United States currently sits around $4.2 trillion. Yes, trillion with a T.

Are you struggling with a lot of debt right now? Are you feeling overwhelmed and unsure of how you’re going to pay it all off?

One of the most common strategies for getting out of debt is taking out a debt consolidation loan. Read on to learn more about this type of loan and how it can help you.

What Is a Debt Consolidation Loan?

A debt consolidation loan combines all of your debts into one single account. Basically, you take out one big loan and use it to pay off all your debts. Then, you make payments on that loan and, once it’s paid off, you’re debt-free.

Most debt consolidation loans are unsecured loans. This means that you don’t have to put up any kind of collateral when you borrow the money to pay off your debt.

There are some types of debt consolidation that are considered to be secured loans, though. For example, if you took out a home equity loan or line of credit to pay off your other debts, your home would be used as collateral, making the loan a secured one.

Benefits of Debt Consolidation Loans

Whether you use an unsecured loan or a secured loan, there are lots of benefits to taking this approach to debt consolidation. Here are a few reasons why you might want to consider it:

Single Payments

Do you have a hard time keeping up with all your credit card and loan payments? If so, debt consolidation is a great option because it combines everything into one monthly payment.

Instead of trying to juggle 5 or 6 different accounts, you can simply make one payment, cross it off your to-do list, and move on with your life.

Lower Interest Rates

Often, when you consolidate your debt, you can also lower your interest rate. This, in turn, lowers the total amount that you have to fork over each month to cover all your bills (who doesn’t want that?).

This is especially helpful when you’re dealing with a lot of credit card debt, as credit card companies are notorious for their high rates. The average credit card interest rate is 16.82 percent, after all.

Better Credit Score

Consolidating your debt may help to boost your credit score, too. When you pay off old accounts and reduce your credit utilization rate, you’ll likely see your score go up a bit, especially after you’ve made a few monthly payments at the new rate.

Keep in mind that at the beginning, your score will likely drop slightly before it starts increasing. This is because you’ve taken out a new loan and opened a new account. In the long-term, though, your score will improve.

Faster Payoff Times

In most cases, you can pay off your debt faster when you consolidate it all into one loan.

There are a couple of reasons for this. First, you’re often paying less because your interest rates are lower. Second, you’re only making one payment per month, which helps you to stay organized and avoid accidental missed payments and late fees.

You may be able to pay off your debt sooner, too, if you work with a debt consolidation company, specifically. They can sometimes negotiate with your creditors to get your total balance owed reduced.

Reduced Stress

Finally, we can’t forget about the stress relief you’ll enjoy when you simplify the repayment process and reducing your debt. By combining everything into one manageable payment, you’ll be able to take a lot of weight off your shoulders and free yourself up to focus on other things.

How to Choose a Consolidation Program

If you’re thinking about consolidating all of your debt into one loan, consider looking into debt consolidation programs rather than just taking out a big personal loan to pay everything off.

When you work with a debt consolidation program, you can sometimes lower the total balance that you owe. They may be able to negotiate better interest rates for you, too.

Here are some tips that will help you choose the right debt consolidation program:

Consider Recommendations and Reviews

A good place to start is by asking for recommendations from friends or family members.

If you know anyone who has used a debt consolidation program in the past, reach out and learn more about the program they chose. You can also search for reviews on third-party sites like Google Reviews or Yelp to learn more about a particular company, how long it has been in business, and how its program works.

Check for Certifications

Consider each program’s credentials and certifications, too. For example, is it certified through the National Foundation for Credit Counseling or another nonprofit organization? This can give you peace of mind and help you feel confident that you’re working with a reputable company.

Read the Fine Print

Before you agree to partner with any type of company, be sure to review their contracts carefully and read the fine print. What do they do if you miss a payment, for example?

The more you know, the less likely you are to run into any unpleasant surprises later.

Ask About Fees

Don’t forget to ask about fees, too. Many debt consolidation programs charge a fee for their services.

Keep this in mind and consider the amount the company charges before you agree to work with them. Compare fees and offerings from a few different companies to ensure you’re getting the best deal and aren’t being taken advantage of.

Is a Loan Right for You?

Now that you know more about what they are and how they work, do you think a debt consolidation loan is a good approach for you? If you’re considering debt consolidation, keep the tips listed above in mind so you can choose the best program for your needs.

Do you want to learn more about getting out of debt or managing your money? If so, head to the Finance section of our site today for more helpful articles.