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How Debt Consolidation Works (And Why You Need It)

how does debt consolidation work

The average credit card holder with revolving debt carries $6,849.00, costing over $1,000 a year in interest.

Imagine how much money you could save if you and your family could eliminate credit card debt for good!

We all know that life happens and we end up carrying balances we wish we didn’t have. We need homes, cars, and food, and life can take us by surprise.

Debt consolidation rolls multiple debts into a single, low-interest payment. 

How does debt consolidation work, and which consolidation solution is right for you?

Debt resolution could give you the credit and clout you need to make purchases you have always wanted and to begin saving for the future. You can become a confident consumer sought after by lenders in just a few short years.

Let’s take a look.

1. The Advantages Of Consolidating

It is difficult to underestimate the difference that debt resolution will make in your overall lifestyle. Your stress levels, health, and even relationships can improve when your debt is under control.

Debt consolidation may be right for you if you are carrying balances on multiple credit cards at varying interest rates. It allows you to make regular monthly payments at a lower interest rate, thus helping you to pay off your debt more aggressively.

Debt consolidation can organize your debt and give you a comprehensive view of what you owe. It can boost your credit score by lowering your credit utilization, which is the amount of credit you are using. 

A debt consolidation solution can provide you with peace about your finances. You will know that all of your debt will be gone within a certain amount of time, as long as you continue to make monthly payments. Most consolidation solutions allow you to take three to five years to pay off your debt.

A debt consolidation plan may be right for you if your total debt, excluding your mortgage, does not exceed 40% of your gross income. Your credit also needs to be decent enough to qualify.

You will need to be certain that you have enough cash flow to meet your monthly payment if you consolidate. If you default, it could hurt your credit score and put you in a more unfavorable financial position. It is also important to have a plan for keeping your debt from running up again.

Speak to a professional about the best option for you. It will depend upon your debt-to-income ratio, and your credit score and profile. 

2. Single Payment Plans

Some options will give you personalized advice and organize and consolidate your credit for you. They will review your credit reports, bills, and finances and help you come up with a plan. The company will act as a mediator between you and all of your creditors.

Once the agreement is reached, you will be responsible only for a monthly payment that will be disbursed to all of your creditors through your credit counselor.

One popular way this is done is through a zero-interest, balance-transfer credit card that will carry the weight of all of your balances in one. 

Be careful when choosing this option. You could get charged as much as 5% to move your balances over. See if you can do a little research and find a card with a 0% balance transfer fee.

You should also be mindful of your interest rates if you are going to go with a single card. Your rate should be lower than the combined rates of your current loans.

3. A Fixed-Rate Debt Consolidation Loan

Another way you can consolidate your debt is by securing a fixed-rate loan from a bank or other lender that will be used to pay off your debt. It could be a credit institution or online lender. You will then pay back the loan in installments over a set term.

As with a single credit card, you will have a simplified plan that will allow you to pay off your debt in a fixed amount of time.

With a debt consolidation loan, you can be certain that your interest rate won’t change. It is the best option if you want to pay off your debts while preserving your credit. 

You can find a loan yourself or use a debt consolidation company to help you find the best lender for you. 

Rates from a lender can be either secured or unsecured. Secured loans come with better interest rates, but they require you to put up collateral. This means you could risk losing your car, home, or other valuables if you default.

Unsecured loans usually have easier approval requirements, including a lower minimum credit score.

Keep in mind that stopping payments could lead to an increase in fees and interests. Choose this option only if you are certain you will be able to make monthly payments if you want to bring up your credit score.

4. Other Options

Some homeowners choose to pay off their debt through a home equity line of credit, in which you borrow against the equity you have in your home. Your interest rate will be lower than it is on most credit cards. The risk with this option is that your home could be in jeopardy if you default. 

Other folks may take out a loan against their 401K plan. This must be paid back in five years.

The risk with borrowing against your retirement is that you may owe income tax if you default. You are also taking a chance that you will have less money to retire with. 

5. The Benefits of Debt Resolution

If you think financial health will improve only your bankroll, think again. The right debt resolution option can lead you to feel more in control of your life, which will create mental and physical health that will sustain you and propel you on to new ventures.

Don’t put off finding the right solution any longer!

How Does Debt Consolidation Work?

How does debt consolidation work? The answer will depend on your income, credit score, and needs as a bill-payer. With the right plan, you can have a set amount of time in which you can look forward to having all of your debts paid off.

For more information on debt consolidation, contact us today.

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