One of the things that can make debt overwhelming is having too many debts. It’s not just the amount, it’s the number of creditors, debt collectors, and old accounts all adding up to an unmanageable mass of debts. You can’t get a handle on debt management because what should be a simple project of repayment goes in so many directions.
The various interest rates, late payment penalties, and repayment methods stand in the way of simply paying down your debt one payment at a time. This is the exact situation that a debt consolidation loan is designed to help you solve.
If you have been feeling trapped by debt on all sides, debt consolidation provides a way to combine unsecured debts from creditors, stop high interest rates, and put your unsecured debt into one low-stress location that you can pay off with a clear plan.
Here's what you need to know.
What Is a Debt Consolidation Loan?
A debt consolidation loan starts by taking out a loan to pay off multiple debts at once. These creditors will no longer be owed money, and the debts will officially be paid on your credit report. Then, you commit to a structured repayment plan in an amount you can comfortably manage with your monthly income.
In other words, a debt consolidation loan can roll your unsecured debts into one easy-to-manage loan, clear your existing debts, and provide you with a path to build a positive credit history by paying off the loan over time.
How a Debt Consolidation Loan Works
Debt consolidation works in a three-stage process:
- You take out a loan that covers many of your unsecured debts
- You repay the loan over time- Monthly payments are structured to be something you can comfortably repay.
- You pay your creditors in full.
From Bad Debt to Good Debt
One of the most important factors of a debt consolidation loan is that it can transform bad debt into good debt.
Bad debt is high-interest debt that increases the total amount you owe, damages your credit score, and makes it difficult to repay with interest and fees. Bad debt can include high-interest credit card balances, unsecured loans, overdue bills, and debts that have been sold to debt collectors.
Good debt includes structured loans and low-interest or secured credit cards that you can easily manage with your monthly income. Regularly paying off structured (installment payment) loans and cycling money through a well-designed credit card will build a positive credit history, which has the potential to raise your credit score.
Debt consolidation takes a group of bad debt and converts it into a single good-debt loan.
Who Benefits From Debt Consolidation?
Debt consolidation is an important and useful tool for anyone dealing with multiple debts. Consolidation means grouping multiple things together. People who are overwhelmed with a large number of debts can consolidate all their unsecured debt, pay them with one large loan, and then manage a single loan repayment to reduce their total debt in a manageable way.
Pros and Cons of a Debt Consolidation Loan
What are the benefits of debt consolidation? Are there any downsides to a debt consolidation loan? Let’s take a closer look at the pros and cons.
Pros
- Turn chaotic and hard-to-pay debts into one easy-to-pay loan
- Transform bad debt into good debt, building a positive credit history
- Close out old debts
- Secure a manageable monthly payment rate
- The potential to raise your credit score over the long term
- Work with debt management pros who specialize in paying off debts in an organized way
Cons
- Limited control over loan terms
- Can cause a temporary drop in your credit score
- Upfront fees to initiate the loan
- Long-term commitment to pay the debt
- Doesn’t solve the root issue - the sudden removal of credit card debts (after paying them off with your consolidation loan) may increase the urge for impromptu spending
For your information.
Debt Consolidation FAQs
What Is Debt Consolidation?
Wrapping up multiple debts into a single new debt. Usually managed in a debt consolidation loan, but can also be accomplished with private loans, peer-to-peer lending, or credit card transfers.
How Does It Work?
Debt consolidation allows you to pay off multiple debts in trade for one larger debt, usually a structured loan with an easy repayment schedule.
What Are the Benefits of Debt Consolidation?
Debt consolidation can transition bad debt into good debt, clear old debts, and get debt collectors to leave you alone. With diligence, this may also result in a long term increase in your credit score after you have paid all your consolidated debts.
What Types of Debt Can Be Consolidated? / What is Unsecured debt?
Unsecured debts can be consolidated, including credit card debts, unpaid bills, overdue accounts, accounts in collections, and debts owned by debt collectors. Learn more about unsecured debt.
How Do I Know if Debt Consolidation Is Right for Me?
If you have several unsecured debts that are difficult to pay off individually or have high-interest loans and penalty fees, debt consolidation may be right for you.
What Are the Potential Risks of Debt Consolidation?
Debt consolidation requires a commitment to the new loan or debt type. Judge terms carefully before consolidating.
How Can I Find a Reputable Debt Consolidation Company?
Research well-respected debt management services and banks with a proven debt consolidation loan program. Seek out companies with reputable accreditations like from the Better Business Bureau. You can also consider companies not just with great reviews, but great reviews across multiple platforms, like Google Reviews or Trustpilot.
Can I Still Use Credit Cards After Consolidating My Debt?
Yes. Debt consolidation does not limit your financial options outside of repaying the loan.
Will Debt Consolidation Affect My Credit Score?
Yes, debt consolidation could raise your credit score over the long term, with timely payments and financial diligence.
What Is the Difference Between a Debt Consolidation Loan and a Debt Management Plan?
Debt consolidation helps you repay multiple debts with one loan. Debt management plans help you address your multiple debts separately in an organized way.
How Long Does It Take To Pay Off Debt Through Consolidation?
It varies depending on the total amount of debt and the interest rate you receive based off of your credit score.
Are There Any Tax Implications for Debt Consolidation?
No, most types of debt consolidation do not affect your taxes.
Can I Negotiate My Debt Through Consolidation?
Yes. You can pair debt negotiation and then meet your repayment obligations through a consolidation loan.
Is Debt Consolidation the Same as Debt Settlement?
No. Debt settlement involves negotiating reduced amounts with creditors. Debt consolidation pays the debt using a loan, and then you repay the loan. Learn more about what a debt negotiation program looks like.
What Alternatives Are There to Debt Consolidation?
Instead of debt consolidation, you can consider a debt resolution program with your creditors or build a debt management plan to pay them separately.
Exploring Debt Consolidation to Achieve Financial Freedom
If you feel trapped by multiple debts, a debt consolidation loan can help you free yourself from your current creditors, stop paying high interest rates, and simplify your debt repayment into one beneficial loan that could potentially raise your credit score over time. Of course, there are many ways to manage debt, and it’s important to find the right method for your personal situation.
DebtBlue can help you choose your optimal debt management strategy and continue making progress toward financial stability, enabling you to achieve financial freedom. Contact us today to learn more.