What is Debt Consolidation?
If you have a good deal of unsecured debt mounting up, it can feel absolutely overwhelming. You may find yourself struggling to pay back what you owe every month but still come up short. This is especially stressful if you have to make payments to several different creditors on a monthly basis. However, there is an option available to you that can make your financial life easier. This option is none other than debt consolidation.
Debt consolidation involves taking all of your debts and combining them into one. The purpose of this is to make it easier to pay back what you owe to your creditors without having to struggle to make multiple payments to multiple creditors at once. Debt consolidation also often involves eliminating hefty interest and fees so that your single payment is less, which further lessens the burden on you.
There are three chief types of debt consolidation, namely, debt consolidation loans, debt management plans and debt settlement. While these options certainly make it easier to pay off your debt, it should be noted that they are not quick fix options. They are long-term strategies that can help you to learn more about how to handle your debt and help you to become wiser about your finances.
What Kinds of Debt Can Be Consolidated?
There are several types of debt that can be consolidated. At the same time, when you choose a debt consolidation program, most likely, you are only able to consolidate the same types of debt into one. These are the types of debts that can be consolidated:
- Credit Card Debt: If you have more than one credit card and owe debt on each of them, you can consolidate all of that debt so that you can more easily pay it back.
- Student Loan Debt: Student loan debt can be consolidated into a single monthly payment minus the sizeable interest. Both private and federal student loans can be consolidated to make it easier to pay back your lenders.
- Tax Debt: When you consolidate your tax debt, the amounts you owe from several years of back taxes are taken and combined into a single repayment option. This is also known as an Installment Agreement (IA), an option that can be chosen through the Internal Revenue Service to make it easier to pay back owed taxes.
What are the Types of Debt Consolidation?
Generally, there are three different types of debt consolidation you may use to help pay back your debts. The specific option you choose depends on your particular situation, such as the type of debt with which you are dealing, your credit, your budget and your financial goals in general. The following are the three main types of debt consolidation:
- Credit Card Balance Transfer: This is perhaps the most popular type of debt consolidation and is designed to help people with large credit card debt. It involves transferring the balances of your existing credit cards to a new card that has an initial zero percent APR. It’s important to note that you must have a good credit score to qualify for such a credit card. Once your balances have been transferred to this new card, you make payments to your creditors using it each month. It’s important to make all payments while the zero percent introductory APR is still valid.
- Personal Debt Consolidation Loan: This option allows you to roll all of your unsecured debts, including credit card, medical bills and loans, into a loan that allows you to make a single payment to pay off the debt. To qualify for this option, your debt-to-income ratio must be under 41 percent.
- Debt Management Program: This option involves negotiating with your creditors so that the interest rates and fees on your debt can be forgiven. This makes it easier for you to pay back what you owe. Creditors are often willing to overlook the interest and fees because they simply want to be paid back. Usually, a debt management plan (DMP) is created by a credit counselor at a credit counseling agency.
Overall, debt consolidation is an option that can deliver great relief when you have multiple debts. It is also a good choice because it doesn’t damage your credit.