Do you find yourself 1) drowning in debt 2) uncertain about what payments are actually due when? If you feel like you’re in over your head and could use some serious financial simplification, then debt consolidation might be the right option for you.
So, what is debt consolidation? In the simplest terms, it means taking out a new loan and using it to pay off all of your older debts so you’re left with one loan (into which all the previous debt has been combined).
What are the Advantages of Debt Consolidation?
Debt consolidation eliminates the confusion that stems from making multiple loan payments each month to different accounts with different lenders, interest rates, minimum payments, repayment terms, and billing cycles.
With debt consolidation, you only have one monthly payment to worry about and – as a bonus – the interest rate is often lower than what you’d be paying on each individual loan. If you consolidate through a bank or credit union, then you’ll get the peace of mind that comes with being given a set amount of time in which your loan will be paid off (and any services fees you’re charged are low.)
What are the Disadvantages of Debt Consolidation?
Because there a couple of requirements you must meet to qualify for debt consolidation, it’s not an option that’s open to everyone. Most debt consolidation requires some form of collateral (often your home or your car) in order for the lender to justify the risk of lending such a large amount of money to someone who’s already in debt (this is called a secured loan).
Borrowers also must have at least a decent credit score. While interest rates for debt consolidation are lower than the rates you would pay for your credit card, they’re still often higher than that of a home equity loan (when you refinance your home). If you try to consolidate your debt without collateral, your interest rate is definitely likely to be higher as well (this is called an unsecured loan).
Who is Eligible for Debt Consolidation?
Debt consolidation is the ideal option for people who are in debt anywhere between $2,000.00 and $100,000.00. In addition to having a decent credit score, there are some other factors that your bank or credit union will look at when deciding whether or not to approve your loan:
- Very few (though ideally no) late payments in your credit history
- No glaring negatives on your credit report (bankruptcy, delinquencies, etc)
- You have a solid income
- The total monthly minimum payment for your new consolidated loan wouldn’t be too high and wouldn’t be a challenge for you to pay with your current income.
- You’re able to offer collateral as security (meaning if you can’t make your payments, the bank or credit union can seize the item you’ve put up as collateral, typically a car or a home.)
Even if you don’t meet all of these requirements, many banks or credit unions are still willing to offer you a debt consolidation loan so long as you can find a co-signer with good credit to vouch for you and take on the responsibility of repaying your loan if you are unable to.