Did you know that the average debt in an American home is $137,063? If you feel like you are drowning in debt and are wondering “how does debt consolidation work?” you are in the right place. We are going to go over the ins and outs of debt consolidation to help you understand everything about it.
Keep reading to learn more and help you make a decision if this is for you or not.
What Is Debt Consolidation?
With debt consolidation, you have the option to combine certain monthly debts into one payment by taking out a lump sum loan. The goal is to get rid of a bunch of payments along with their interest rates and have one sum that you can afford and one interest rate rather than multiple ones.
How Does Debt Consolidation Work?
A debt consolidation service will negotiate on your behalf with all of your debtors. They will try to get the amount owed lowered and will also negotiate a repayment plan that you can afford under your current income circumstances.
After they negotiate with everyone that you owe money to, they will craft a debt consolidation plan for you. Then they will give you your repayment options, typically the more you pay each month the lower your fees and interest rates are.
Keep in mind that not all debt can be consolidated. The only debt that you can consolidate is unsecured debt. This is the debt that doesn’t come with collateral like vehicles or homes. Unsecured debt includes payday loans, medical bills, cell phone bills, student loans, credit card debt, and unsecured personal loans.
When It’s a Good Idea
Debt consolidation is a good idea when your credit is good enough to qualify for either a 0% interest rate or for a low-interest debt consolidation loan. It is also a good idea when your total debt is not more than 40% of your gross income.
You also want to make sure you have a plan in place to prevent running up a ton of debt again. The only way the debt consolidation will truly work is if you change your spending habits. Going through all the hassle of paying everything back to only go back to running up all of your credit will put you in a never-ending cycle.
Ready to Consolidate Some Debt?
Now that you know more about what debt consolidation is and how does debt consolidation work you can make an informed decision. Debt consolidation is not for everyone especially if you have a low credit score. You might end up paying higher interest rates going this route.
Make sure that you read all the fine print and make sure that you are not going to end up paying more than you currently owe.
Did you find our article helpful? Please check back often to never miss our latest finance-related posts!