Debt consolidation is when you take a new loan to pay off other outstanding loans or credit card debt and join them into one payment. When you consolidate your debt into one loan, usually the combined monthly payment is lower, plus your interest may also be lower, allowing you to pay off the debt quicker than making minimum payments on multiple outstanding balances.
Debt consolidation loans take all of your credit card and other debt and combine them into one loan with one payment. As a borrower, you should look to obtain better loan terms, such as a lower interest rate, so the new payment is less than what you are currently paying out to creditors. The added benefit is only making one payment per month vs multiple payments.
When it comes to debt consolidation loans, there are several things to consider. Finding the right solution often depends on your circumstances, such as the amount of debt and your credit score.
Do I need a loan to consolidate my debt?
Debt consolidation is an option that many people are using to address the high levels of money owed on their credit cards and other debt. Usually, a person obtains a debt consolidation loan from a lending institution and uses it to consolidate all outstanding debts into one loan. When you consolidate debt, you’re left with a single monthly payment, which is often at a lower interest rate. The result is that it’s easier to manage your outstanding debt so that you’ll be in a better position to pay it off.
Here is a list of some debt consolidation methods below:
- Pay down the debts yourself
- Get a debt consolidation loan
- Transfer your balances
- Settle your debts
- Choose National Debt Relief
Since there are several different methods of debt relief out there, you must understand what each one does and decide which type of help that’s right for your situation.
Debt consolidation requirements
Although you may be interested in consolidating your debt, there are still requirements to qualify you for a debt consolidation program. Borrowers need to show you have the income and credit profile necessary to qualify, especially if you are going to a brand-new lender. The kind of documentation you will need often depends on your credit history, the most common pieces of information include a letter of employment, two months’ worth of statements for each credit card or loan you wish to pay off, and letters from creditors or repayment agencies.
Once you get your debt consolidation plan in place, you should consider who you’ll pay off first. In a lot of cases, this may be decided by your lender, who may choose the order in which creditors are repaid. If not, pay off your highest-interest debt first. However, if you have a lower-interest loan that is causing you more emotional and mental stress than the higher-interest ones (such as a personal loan that has strained family relations), you may want to start with that one instead.
Types of debt consolidation
There are different types of debt consolidation, and some will require your credit to be good to obtain the loan.
First, there are two types of debt consolidation loans: secured and unsecured loans. Secured loans are backed by one of your assets, for example, your home or car. Your personal items serve as collateral for the loan.
Unsecured loans do not need asset backing but can be harder to obtain. Because of the type of loan, the interest rates could be higher with fewer loan amounts available to you. But the interest rates are fixed, and you still will pay less in repayment than trying to pay off multiple loans on your own.
How to consolidate debt
When it comes to deciding on how to consolidate your debt, you have a few choices. We will share some of the options below.
Debt Consolidation Loans
Traditional banks and peer-to-peer lenders like Prosper, offer debt consolidation loans as a solution for debt that is spread across multiple places like credit cards. A debt consolidation loan allows for one payment, every month, usually an automatic pull from your bank account, and it stops the debt collector calls.
Depending on your credit score and what options you have, sometimes you can take your outstanding debt and consolidate it into one credit card. There are options for new credit cards with no to low-interest rates for a period that you can do a balance transfer to pay off your debt. Other options could be taking an existing credit card to transfer your debt to if they are running a promotion with a fixed rate or low-interest rate. Each credit card company has its own options, and you would have to contact them to find out.
Some creditors may have a hardship program where you may qualify for an agreement plan or pay a certain amount per month for a certain amount of time to pay off the debt, with no additional interest. Again, this is where you would need to reach directly to your creditors to discuss.
For example, if you owed $5000 on a credit card you could contact the issuer and offer to make a lump sum payment of $2500 to settle the debt. If you can prove that you are suffering from a serious financial hardship the credit card company might agree to settle for the $2500. You will need to have the documentation available to prove you really have a serious financial hardship including a list of all your debts, the amount you owe on each, the last time you were able to make a payment on them, and any minimum payments.
If you own a home, a HELOC may be another option to pay down your debt. A HELOC is a home equity loan or a home equity line of credit. This is based on your home value, and it serves as a second mortgage or open line of credit. Some HELOCs will have a fixed rate for the first six months to a year and then switch to a variable rate, but the interest rate is usually less than what a credit card company could charge you.
Debt consolidation loan monthly payment examples
To help you decide if a debt consolidation loan is right for you, let us help you with some examples of what your monthly payment could be, compared to paying multiple creditors vs one payment.
Debt consolidation loans for good credit scores
For a $35,000 debt consolidation loan with a very good credit score between 740-799, you can expect an interest rate of around 10.99%. Here’s what your monthly payments could be with a lender:
$1146 for 36 months = $41,256 total cost over 3 years
$904 for 48 months = $43,392 total cost over 4 years
$761 for 60 months = $45,660 total cost over 5 years
$666 for 72 months = $47,952 total cost over 6 years
$599 for 84 months = $50,316 total cost over 7 years
Debt consolidation loans for bad credit scores
Most lenders require a minimum credit score of 660 to qualify for a loan. Otherwise, your interest rate would be too high for it to make financial sense to even take out the loan. This is because a low credit score is riskier to lenders, so they charge more fees and higher interest rates to compensate for that risk.
If you have a good credit score, you can find a company that doesn’t charge an origination fee, but you can expect to find a 1% to 5% origination fee if you have bad credit. Plus, you could have interest rates anywhere from 29.95% to 35.99% or even higher.
Now compare these consolidation loan examples to what it would cost to use a program like National Debt Relief that helps you resolve your debt for less than the full balance and help you get out of debt in 24 to 48 months.
Choose National Debt Relief
When is debt consolidation a good option?
If you don’t like having to keep track of your expenses and bill payments, debt consolidation could be a good option for you. Debt consolidation allows you to make just one payment per month to one creditor, rather than having to keep track of a pile of different monthly minimums, all due at different times. You also face a lower payment and interest rate, each of which can give you a bit of breathing room with your finances.
- Reduced Number of Payments
Making one payment per month lessens the chance that you will miss a payment due date. Your credit score will thank you!
- Lower Payments
If done successfully, debt consolidation can allow you to begin saving money and building a financial safety net that can help avoid falling back into debt.
- Lower Interest
You will receive a lower interest rate that will help pay off your credit card debts faster.
- Getting Caught Up
A debt consolidation loan can help consumers get their bills caught up if they are consistently running behind each month.
When is debt consolidation not a good option?
Freeing up credit once again can be a temptation for some people if you don’t change spending habits. Depending on the type of loan you choose, you could actually end up paying more in interest over the life of the loan.
- Accumulating Credit Card Debt Again
If you don’t tighten your belt and be disciplined enough to not spend the open credit again, you will not get out of debt.
- Paying More in Interest
For example, if you use a HELOC, this means that even with a lower interest rate, you will actually pay more interest than you would if you just paid off the credit cards.
- Unchanged Spending Habits
If you don’t change your spending habits after debt consolidation, it is very possible you could find yourself buried in debt again in a very short time.
- Those Unable to Qualify
A debt consolidation loan can be a good option, but if your credit score is low or income is not steady or can be verified, it will be difficult to gain approval for a loan.
A better alternative may be to work with a debt relief company to help you resolve your debt situation. National Debt Relief works with individuals like you, to negotiate settlements with their creditors. By taking over the communication process and working with credit card companies to reach a reduced settlement amount, National Debt Relief helps consumers finally become debt-free. While debt settlement isn’t a fast process, your credit rating will be impacted. If you’re way behind in your bill payments, settling the debt with our help is a good option.
Overcoming a big debt problem can be stressful and overwhelming for anyone. It’s important to take action before your choices become few. Take control of your debt problem today and get on the road to financial freedom. NDR has already helped more than 100,000 families and individuals achieve freedom from their debts since the company was founded in 2008. We have achieved this by helping pay off more than $1 billion in unsecured debts.
How National Debt Relief works
After reviewing your situation, we work out a program to settle your debt, and contact you and ask that you release the funds necessary to pay it. If it turns out that there is not enough money in your account to settle all your debts, we will offer you a payment program. When you accept the offer, then your debt is consolidated because you will have just one payment to make a month – to National Debt Relief. Most of our customers can complete their payment programs in 24 to 48 months – depending on the size of their debts.
National Debt Relief is accredited by the Better Business Bureau with an A+ rating and belongs to the American Fair Credit Council, which is the watchdog of the debt settlement business. To be a member of this Council, we are pledged to treating our customers transparently, honestly, ethically, and fairly.
To learn more about the debt settlement process, call National Debt Relief at 800-300-9550 or complete the no-obligation debt consultation form today. You’ll receive more debt consolidation advice and discover how to get your finances back on track.