Debt can often feel like an uphill battle, but there are ways to make that fight a little easier. Debt consolidation programs help you combine your debts so you can pay them off through manageable monthly payments. It makes payments simpler and potentially gets you a lower interest rate.
This is a possible solution for anyone struggling with debt. However, it’s important to know how debt consolidation programs work, the types of debt consolidation loans available, the benefits of these programs, and how to choose and apply for the right debt consolidation program for you. Here’s more on what you need to know.
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What Is Debt Consolidation?
Debt consolidation is a financial strategy that combines outstanding debt to make it easier to make payments.
A consolidation loan is a common avenue. It generally has a lower interest rate (after considering the interest rates of each individual loan) and offers a single monthly payment that’s typically more affordable than if you paid each debt’s minimum monthly payment independently.
How Do Debt Consolidation Programs Work?
Debt consolidation programs are designed to simplify your repayment plan, giving you a single monthly payment rather than variable (or multiple) monthly payments to cover. Some consolidation plans include management support and debt settlement — but it depends on your financial situation.
The three kinds of debt consolidation plans are:
- Debt management plans. These go through credit counseling agencies. They negotiate with your lenders to reduce interest rates, fees and other challenges that are keeping you in debt. It consolidates your debt because you will then make a monthly payment to the agency, and they pay the creditors for you.
- Debt consolidation loans. These are available through banks, credit unions and other lenders. You take out a loan large enough to cover the other debts, then you pay them off. You pay down the new loan over time.
- Debt settlement plans. Debt settlement is unique because it does reduce your debt burden, but by you or a company negotiating to pay less of it. However, when you get a debt settled, it typically becomes taxable income.
For basic debt consolidation program loans, you’ll simply be rolling all your debt onto a larger loan, paying off the old creditors and paying down the new loan month by month.
Types of Debt Consolidation Loans
You have several debt consolidation loans to choose from, according to the Consumer Financial Protection Bureau. The first is a credit card balance transfer. It can offer you low- or no-interest transfers that help you pay down debt without as much additional interest piling on top.
The second type is a standard debt consolidation loan, which can vary in its terms based on how you get it. Debt consolidation loans are typically installment loans, meaning they have a start and end date as well as a specific repayment plan and cost. Some may be at lower interest rates than others.
The third kind of consolidation loan is a home equity loan. If you own a home and have debts to consolidate, this kind of loan can help by allowing you to pay off all your creditors and then repay the home equity loan on its own. With only a single loan to repay, you may find it easier to manage your finances (and you could get a better interest rate, too).
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Benefits of Debt Consolidation Programs
Debt consolidation programs do have downsides. For example, some credit counseling agencies charge fees, and you may not be able to get a lower interest rate. However, there are also benefits such as:
- Potentially lowering your interest rates, particularly if your debt is unsecured (for example, credit card debt).
- Reducing your overall monthly payment by getting rid of multiple minimum payment requirements and combining them into one.
- Improving your credit score by showing you can make your payment on time and in full every month.
- Speeding up your payoff. You can make a single large payment and the interest may be less than before, so you’re paying off your debt faster. Debt consolidation does tend to extend the terms of your debt repayment plan to make it more manageable month to month, though, so keep that in mind.
How To Apply for a Debt Consolidation Loan
How you’ll apply for a debt consolidation loan can depend on several factors. For example, you may apply for a personal loan to consolidate your debt at a bank, reach out to your mortgage lender for a home equity loan or take advantage of a balance transfer you receive in the mail from your credit lender.
Before you apply, remember your financial situation and credit will matter. Debt consolidation can help you save money, but you should know your current interest rates, how much you pay for all minimum payments, the length of time you want to use to repay the debt and other information before looking for a loan.
If your credit is poor, the interest rates you’ll be offered may be much higher than what you have on your debts now. And, in worst-case scenarios in which your credit has been obliterated, getting a loan might be close to impossible.
Once you have the basics down, you can search online, through your bank or even through your lenders for applicable loans. Most applications are digital, but for some, you may need to walk into a credit union or bank for help. You’ll need to have pay stubs, a photo ID and potentially other documentation to apply.
Tips for Choosing the Right Debt Consolidation Program
To choose the right consolidation program, ensure you check reviews and “shop around.” You don’t necessarily want to go with the first solution you find on Google because every program is slightly different. It’s necessary to vet the programs and check their terms and benefits before agreeing.
Scams are abundant online, so your top tip is going to be to check reviews thoroughly. Even better, ask your banker or lender for a referral.
Other tips include:
With good research, it’s possible to find a loan and consolidation program that can help you get out of debt quicker. Be cautious of fees, penalties and the loan’s terms, and you may find that perfect gem to get you out of debt once and for all.
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