Debt consolidation is getting a single loan to replace many unsecured debts, such as credit card balances. If you have a number of credit cards, you will no longer need to make numerous payments each month. Instead, all of your debts will be combined into one, for a single monthly payment.
Example 1: If you owe money on a line of credit, four credit cards, and a finance company loan, you may be able to get a debt consolidation loan to repay all of your debts, so that you only have one payment instead of six payments each month.
Example 2: If you currently carry a $5,000 balance on three credit cards, with an interest rate of 18% per year, you are paying approximately $225 per month in interest on your $15,000 in debt. If the credit card requires you to pay, say, 3% of your balance off each month as well, your monthly payment next month will be approximately $675. With a debt consolidation
loan at a 7% interest rate, paid over five years, your monthly payment is less than $300 per month, for a very significant savings.
A debt consolidation loan is generally provided by a bank or credit union. There are also debt consolidation services that will broker the loan from a bank or other lender to you.
If you qualify for a debt consolidation loan, it could cut your interest costs and simplify your monthly payments, helping you to get control of your finances.
With a debt consolidation loan, you may be able to keep or improve your credit rating and avoid bankruptcy, without the need for credit counseling.
Benefits of a debt consolidation loan
The advantages of a debt consolidation loan are:
- Budgeting your cash is easier with one monthly payment, replacing the numerous debt payments you have now.
- With a single monthly payment, it is easier to remember when your payment is due each month.
- Debt consolidation loans generally have lower interest rates than the rates you are paying on credit cards and other high interest rate debts. That means more of your monthly payment goes toward reducing your debt.
- Your total monthly payments could be reduced, by obtaining a lower interest rate and perhaps paying the loan over an extended time period.
- Repaying all of your debts in full with a debt consolidation loan leaves you with, in most cases, a perfect credit report.
Do I qualify for a debt consolidation loan?
To qualify for a debt consolidation loan:
- You must give the bank or other lender a copy of your monthly budget. This is to prove that you have the ability to make payments.
- You must be have a stable source of income, such as employment wages.
- You may require a co-signor or collateral (such as a car or a house).
- If you have poor credit, a co-signor will probably be required. Asking someone to co-sign for you is a difficult decision and should not be taken lightly, as any non-payment by you will directly affect your co-signor’s credit score.
Try our debt consolidation loan calculator for a quick indication of whether if you qualify for a debt consolidation loan. Read our debt consolidation blog for further information.
To fully determine if you qualify for a debt consolidation loan, contact your banker or finance company.
How can I decide my next step?
As a general rule, if you can afford to repay all of your debts over a three to five year period or less, then a debt consolidation loan is probably the correct option for you. Of course this assumes that you qualify for a debt consolidation loan, and have a secure source of income from which to make the payments over the life of the loan.
If you believe you probably qualify for a debt consolidation loan, your next step is to approach a debt consolidation service, which may be your local bank.
If you do not qualify for a debt qualification loan, go to our step 2, to determine whether credit counseling and a Debt Management Plan can help you.
If that doesn’t work, then you should consider bankruptcy under either Chapter 13 or Chapter 7. Explore bankruptcy in our step 3.