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Using a Debt Consolidation Company - Consolidating Your Debt 

Using Debt Consolidation to Get Out of Debt

Last Update: July 12, 2016

More and more Americans are falling further and further into debt. If you have fallen behind on your payments, it can feel like there’s nowhere to turn. One possible option to get organized and streamline your bills is debt consolidation. Debt consolidation lets you roll several debts into one loan with a lower interest rate and longer payment term. That means you’ll pay less each month to just one lender instead of making payments to multiple creditors.

While it’s not as drastic as debt settlement or debt management, debt consolidation has its own pitfalls that you need to be aware of. If you need help educating yourself on your debt consolidation options, read on.

What is Debt Consolidation?

Debt consolidation is when you consolidate your debts by taking out a new, bigger loan to pay off a bunch of your existing debts. Instead of paying several different creditors, you’ll be paying a single bill for the new loan. Your monthly payment will likely be lower with the new single loan than the combined payments of your previous debts. Unlike debt settlement, you do not actually reduce the principal amount you owe — you will still be paying the full amount.

Debt consolidation is not without risks. Experts warn against consolidation unless you’re truly struggling to make minimum payments on your debts each month and are ready to turn over a new leaf with your spending habits. Here are the pros and cons of debt consolidation.



Types of Debt Consolidation Loans

The first type of loan is a secured loan which is tied to some sort of collateral - a valuable asset that the lender can take in the event you no longer pay your bills. Common collateral includes your house or car. It’s easier to get a secured loan since there is less risk to the lender. For the same reason, it’s also usually easier to get a larger amount at a lower interest rate. The interest may also be tax-deductible.

Of course, while it’s easier for you to land this kind of loan, you could also lose your assets if you default. You may also be paying down this kind of loan for much longer. Home equity loans are among the most common kind of secured debt consolidation loans.

The second type of loan is an unsecured loan which is not tied to collateral. Because of that, it’s less risky and if you default on this loan you are only risking credit damage instead of an asset. Unsecured loans also usually take less time to pay down.

However, getting an unsecured loan is tougher, especially if you have bad credit. Because the lender takes on more risk with unsecured loans, you’ll probably be offered a higher interest rate and a smaller amount, and there are no tax benefits. Personal loans, credit-card balance transfers, and loans offered solely for the purpose of debt consolidation are among your options here.

Alternatives to Debt Consolidation

If debt consolidation doesn’t seem quite right for your situation, there are several other debt-relief methods. Of course, all of these strategies have their own pros and cons, and only you can decide whether they are better or worse for your unique situation.

How to Avoid Debt Consolidation Scams

If you’re in the market for a debt consolidation loan, remember to keep your guard up. Unscrupulous companies target people seeking any form of debt relief, including personal loans. Here are some things to keep in mind:

Debt consolidation can be an excellent option if you’re ready to dig your way out of debt for good. A debt consolidation loan will allow you to stay organized and pay off your debt with a reasonable interest rate and affordable monthly payment.

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