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Client Log InHow Does Debt Consolidation Work?
The process of debt consolidation involves consolidating multiple debts into one single loan, typically resulting in a lower overall blended interest rate and a more manageable monthly payment. A debt consolidation loan (DCL) provides the dual benefits of streamlining the repayment process while simultaneously lowering interest expense and the total amount repaid over time. Types of DCLs include personal loans, promotional low-interest rate credit card balance transfers, home equity loans and student loan consolidations. For those individuals struggling with a large amount of high interest rate debt, a debt consolidation loan is one way to refinance your debt. Learn how debt consolidation works and how it can help you stay organized and possibly save money.
How it Works
In a debt consolidation loan scenario, a debtor borrows sufficient funds to first pay off all unsecured debts (high interest rate credit cards, medical bills, some student loans), thereby simplifying multiple monthly payments into one single monthly payment at an overall lower blended interest rate. Funds generated from a DCL are to be immediately deployed for paying off existing balances (ideally, in full) on a number of pre-existing debts. When several bills are consolidated into one simple monthly payment, the risk of submitting late payments that cause additional fees and credit score damage, as well as the risk of making mistakes related to sending inappropriate amounts to certain creditors are decreased. The recipient of a DCL also usually benefits from a reduction in the overall monthly payment on the aggregate debt balance while lowering interest rates and interest expense.
Additionally, debt consolidation can help protect your credit score while getting the debtor out of debt in a shorter period of time. As long as the debtor acts responsibly and makes regular timely payments, debt consolidation will have a positive impact on a debtor’s credit score.The DCL provides the dual benefits of streamlining the repayment process while simultaneously lowering interest expense and the total amount owed over time. However, it is important to know in advance whether your cash flow is sufficient to cover the cost of the monthly payment on a new fixed rate DCL. As a general rule, the total amount of your debt should not exceed 50% of your annual income – otherwise it could make better sense to pursue alternate forms of debt relief that include debt settlement, a debt management plan, or even bankruptcy.
Related to: Debt Consolidation
How Do Consolidation Loans Work?
Debt consolidation requires organization, patience, time and self-discipline. Begin by itemizing all of your bills – credit card, medical, utilities, and any other unsecured debt. Next, tally your basic necessity expenses separately – housing, groceries, transportation, and given your regular monthly after-tax income, determine how much you will have left over that can be allocated toward a single monthly payment against your unsecured debt. It is important to recognize that although DCLs are popular for the convenience and debt savings that they often provide, they can sometimes result in longer repayment schedules, depending on how low your new monthly payment amount becomes. It is also important for the debtor to possess the self-discipline necessary to adjust away from the poor spending habits that led to accumulating excess debt in the first place – otherwise any debt consolidation loan simply isn’t likely to work in the long run.
Debt consolidation loans are generally available through banks, credit unions, and online lending sites. Additionally, those individuals with stronger credit scores in the 700s or higher should investigate debt consolidation through promotional low interest rate balance transfer offers on credit cards. Although promotional low introductory balance transfer rates often expire within 6-18 months and can carry fees in the range of 3-5% of the amount transferred, most every dollar paid on them will go toward reducing the principal on the debt.
