What is Debt Consolidation?

Debt Consolidation Article

Summary: Instead of making separate payments on multiple debts, consumers can consolidate their financial obligation into one monthly payment. Consumers can consolidate their debt in an array of ways that best fit their financial needs and goals.

Have You Heard About Debt Consolidation?

Debt consolidation allows consumers to roll multiple debts into one single monthly payment; depending on the form of debt consolidation, consumers may receive a lower interest rate.

Debt consolidation is a great tool to help tame overwhelming debt such as student loans, credit cards, and any other forms of debt.

Benefits of a Debt Consolidation

Consolidating your debt holds various benefits. For starters, compared to the high interest rates of credit cards, student loans, auto loans, and even medical bills, consumers can consolidate all their debts into one payment and at a low interest rate. This single payment can help consumers be more organized during repayment instead of handling numerous accounts at once.

The debt consolidation may also improve a borrower’s credit score. Making payments on-time shows consistency and active responsibility towards the debt; this consistency and responsibility may positively impact your credit score. Having a high credit score is beneficial when borrowers apply for a mortgage or buy a house.

A single monthly payment can help ease straining debts that were once overwhelming and make repayment easier for consumers—this ease can encourage and motivate many to pay off their debt.

Types of Debt Consolidation

If you are considering consolidating your debt, here are a few ways.

  • Cash-Out Refinance
    • A cash-out refinance is a refinance mortgage that allows homeowners to take cash-out of their home.
    • Depending on the housing market, homeowners can receive better mortgage terms and lower interest rates.
    • The funds from the refinance allows homeowners to use the home equity to withdraw cash and roll their high interest debts into their low-interest mortgage payments.
  • Home Equity Loan
    • Homeowners use the equity they have within their home for debt consolidation.
    • The amount available to a borrower is dependent on the equity within the home.
    • It has a repayment period of five to thirty years.
    • Contact your mortgage lender to learn more about their qualification and loan limits.
  • Debt Consolidation Loan
    • A debt consolidation loan allows borrowers to pay off other debts in one sum and then focus on paying off the consolidation loan.
    • This loan does not erase the original debt but transfers it to a different lender.
  • Credit Card Balance Transfer
    • Consolidate all your credit card debts by transferring them to a new credit card that has an interest-free promotional period.
    • Try your best to pay off the balance before the interest-free period is up.
  • Personal Loans
    • These are often unsecured loans (there is no collateral if the borrower defaults on the repayment).
    • It is the borrower’s responsibility to use the funds for debt repayment and not on purchases.
  • Debt Management
    • Contact a credit counseling agency to help outline and implement a debt repayment plan.
    • Consumers will send monthly payments to the counseling agency who will disperse the funds to the different debts.
  • Dipping Into a Retirement or a Savings Account
    • Consumers can dip into their 401K accounts or a savings account to pay off debts.
      • For 401K, there are no credit report checks as the money is yours.
      • Taxes will need to be paid for withdrawing the money before the age of 59 and a half.

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