How to Consolidate Your Debt

Debt consolidation allows you to place all your debt into one location so that you can make one large payment every month.

This is in contrast to multiple, smaller payments to different lenders and credit card companies and may help you keep track of the total amount of debt you owe. However, you may find it difficult to receive approval for a consolidation loan, especially if you have a poor credit score or your income is very low.

Our debt consolidation tips may help you understand the options available to you during this difficult process. We have researched several solutions for monetary issues, such as debt-relief programs, consolidation loans with fixed rates, direct consolidation loans for students and more.

These guidelines may give you a general understanding of how to become debt-free and how to save money on the total cost of your loans.

What are debt consolidation programs?

A debt consolidation program may be an excellent option if you have a serious amount of debt and need professional assistance. This type of program may help you with unsecured debts, such as credit cards and personal loans, as well as home loans and private student loans.

Private student loans issued by non-government lenders often have high interest rates, which worsens the debt problem for American students. A debt consolidation program may also help you with tax debts from the Internal Revenue Service (IRS).

You may need professional assistance if you are delinquent on your payments or want to decrease the length of time it takes to become debt-free. A consolidation company may help you create repayment plan and give you insights on settlement or forgiveness options.

To find a program that suits your needs, research several different companies. Checking the reviews for a company is often a good place to start. Then, find out how many years of experience a company has and how much it charges for the program. Be sure to ask for quotes from several debt-relief companies, so that you may compare prices and find the most affordable program.

What You Need to Know About Student Loan Debt Consolidation

You may consider taking part in a student loan debt relief program if you are saddled with an extremely high amount of debt.

In addition, you may receive forgiveness if you meet certain requirements. If you are a not-for-profit or government employee, for instance, you may qualify for the Public Loan Forgiveness Program. You must work for your qualifying job full-time for at least 120 months.

You may be accepted into the forgiveness program if you work for:

  • A government organization. This includes organizations at state, local and tribal levels.
  • A not-for-profit organization which is legally tax-exempt.
  • A not-for-profit program that does not have tax exemption but still provides public services.
  • AmeriCorps or Peace Corps.

If you do not participate in the Public Loan Forgiveness Program, you may consider a form of debt consolidation or an income-driven payment plan request. The Department of Education may grant you a direct consolidation loan for student debt, which allows you to combine all your loans into one loan with a fixed rate. The application is free through the federal department of student aid.

In contrast, the income-driven payment request will not consolidate your debt but instead lower your monthly payments. You may need to make this request if you do not have a high-paying job and it is difficult for you to make your loan payments.

There are four main payment reduction plans, such as Pay as You Earn (PAYE), Revised Pay as You Earn (REPAYE), Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR).

Pros and Cons of the Debt Consolidation Loan

A debt consolidation loan gives you the chance to unify all your debt payments and stay more organized. If you qualify, a lender will pay off your existing debt and then give you a single, large loan. You must then pay off the loan in monthly installments.

A debt consolidation loan may only be worth it if you have good credit. A good credit score will give you a better chance at qualifying for lower monthly payments or a fixed-rate, which is an interest rate that never fluctuates. A fluctuating rate may start out much lower than a fixed-rate, but it will increase significantly the longer it takes you to pay off the loan.

If you are unable to demonstrate your ability to make payments on time, you may not qualify for a debt consolidation loan. Furthermore, this plan may not be a good idea if your debt reaches more than 50 percent of your income.

Other Ways to Consolidate Credit Card Debt

If you do not use a debt consolidation loan to combine all your debt, you may consider a different method, such as a balance-transfer credit card, a home-equity loan or a 401(k) loan. A balance-transfer credit card is similar to a loan because all your debt will become the responsibility of one lender.

It is different, however, because you may have the option of a 0 percent introductory interest rate. The 0 percent rate typically does not last beyond a promotional period. If you make a significant amount of payments during the promotional period, you will lower the amount you owe in interest.

A home-equity loan is sometimes referred to as a second mortgage and involves borrowing money against your home. In effect, you use your home as collateral. If the market price of your home is above what you owe on your mortgage, you will have equity. A 401(k) loan also involves borrowing money against your own assets, though in this case you are using your retirement funds as collateral.

You may need the help of a professional if you fall into a debt spiral. A debt relief program will work with you to create a plan of action and find the best solution. It will help you keep track of what you owe and give you goals.

Financial advisors may also negotiate with your lender to reach a settlement on your debt. To get to this point, you must make direct deposits each month to a savings account. This money gives you leverage in the negotiation process.

Getting Out of Debt

Ultimately, the only way to truly become debt-free is to make monthly payments in a diligent and consistent manner. Do your best to meet payment deadlines and pay more than the minimum requirements each month.

Additionally, you may consider establishing automatic payments through your bank account or setting aside a certain amount of money from each paycheck for debt payments. If you stop increasing your debt, you will prevent yourself from spiraling and may create a feasible plan.