Ready to take control of your finances?
Debt consolidation provides a powerful way to streamline payments and reduce interest.
Plus, it can even help you lower your monthly debt burden.
Even if you don’t need it right now, debt consolidation is a strategy everyone should know and understand.
In this article, we’re going to reveal how debt consolidation can strengthen your financial life.
What Is Debt Consolidation?
Loans are a very common type of debt.
Whenever you take out a personal loan, obtain a mortgage, or swipe a credit card, you assume debt responsibilities with the obligation of paying them back by a certain date.
However, as millions of people across the U.S. know, it’s incredibly easy to get behind on payments.
That’s where debt consolidation can help: by taking out a new loan, you can combine multiple old loans into a single monthly payment.
So instead of managing a bunch of debts, you can roll them into a larger loan with lower interest rates, better payoff terms, and more affordable monthly payments.
In other words, debt consolidation can help you get out of debt faster—and with greater convenience.
Note: debt consolidation is often used interchangeably with “credit card refinancing.” They both refer to the same process of accessing a personal loan to pay off old debt.
Debt Consolidation vs. Debt Settlement
Debt consolidation combines debts into a single monthly payment, whereas debt settlement refers to a negotiation.
A settlement occurs when a consumer convinces creditors to reconcile outstanding debts for less than what is owed.
In most cases, debt settlement is only possible if you carry a truly unmanageable amount of debt, and if bankruptcy is not a viable option.
Though you can hire a licensed debt settlement company to negotiate your debt, some consumers have had success dealing with creditors directly.
Do note that debt settlement can have an extremely negative impact on your credit score, so, proceed with caution.
Before you get to the stage of having to negotiate your debt, consider a debt consolidation loan.
How To Consolidate Your Debt
Depending on your current financial situation, there are five primary debt consolidation strategies to consider:
- Balance transfer credit cards
- Home equity loans
- 401(k) loans
- Student loan refinancing
- Debt consolidation personal loans
In this article, we’ll discuss how you can initiate debt consolidation via a personal loan. Generally speaking, there are five steps to get started.
Step 1: Get Prequalified
Getting “prequalified” is the process of obtaining a document from a lender stating how much they’re willing to lend to you.
Start by identifying the best potential loans available to you.
These offers may be found at your current bank, credit union, or credit card company. If those don’t suit you, you can reach out to a private lender.
Create a list of potential lenders, and when you’re ready, get prequalified on their websites.
If you need help getting started, CNBC lists their favorite debt consolidation loans right here.
Step 2: Compare Your Offers
After you have received multiple loan offers, carefully compare and contrast the details.
While you’ll certainly want to look for the lowest interest rates, keep in mind that the lowest rate may not actually be the best overall deal—some lenders may charge hefty fees that counterbalance their interest rates, ultimately costing you more money in the long run.
Step 3: Prepare Your Documents
When you’re ready to apply for a loan, gather all your documents and financial information. This will help expedite the application process.
In addition to collecting your bank statements, tax returns, and recent pay stubs, you will also need to organize your current liabilities and debt obligations.
Step 4: Submit Your Application
While most loan applications are fairly easy to complete, be prepared to answer specific questions regarding:
- Identity verification
- Income level
- Your employer
- Your housing status
Be sure to fill out the application in its entirety, and double-check your entries for any errors.
Step 5: Pay Off Your Debts
After you’ve been approved and have received the funds, you’ll be that much closer to a successful debt consolidation.
From here, your job is simple: to make payments on time, every time—until your new loan balance is paid in full.
And if you’re able to make extra payments, do it!
Remember: with more favorable terms and lower interest rates, your debt consolidation loan provides a golden opportunity to reset your finances.
Benefits of Debt Consolidation
As we’ve discussed, debt consolidation is a fairly straightforward process.
You take out a new loan, you use that loan to pay off old debts, and over time, you pay off the new loan.
While debt payments of any kind may not sound exciting, debt consolidation provides three powerful benefits.
1. It Streamlines Your Finances
Debt consolidation reduces the number of payments and interest rates you need to worry about.
Multiple distractions become one unified obligation.
Instead of struggling to manage various liabilities, this puts you in the driver’s seat of a clearly-defined debt strategy.
2. It Helps Expedite Repayment
Debt consolidation is the light at the end of the debt tunnel.
The reason is simple: since your new loan accrues less interest, you put yourself in a position to make extra payments. And when you make extra payments, you pay off the debt earlier.
After all, the more you pay now, the less you’ll pay later.
3. It Lowers Monthly Payments
In addition to enjoying lower interest rates, you’ll also likely benefit from decreased monthly payments.
Your budget will breathe a sigh of relief, and you’ll have more cash available for other expenses.
Keep in mind that while you may be paying less per month, you could actually end up paying more in the long run, as debt consolidation typically involves extended loan terms—that’s why extra payments are so important.
Though there are many benefits to debt consolidation, they all depend on your unique repayment strategy.
If you’re unsure of the right steps, be sure to contact a financial advisor to leverage their expertise.
Requirements for Debt Consolidation
As with any loan application, lenders assess a potential borrower’s “creditworthiness.”
The same rules apply to debt consolidation.
In addition to the documents discussed above, you should also be prepared to provide:
- A letter of employment
- Several months of bills for each credit card and/or loan you wish to pay off
- Any relevant letters from other repayment agencies or creditors.
Though that may sound rather complicated, don’t worry: many lenders are eager to issue debt consolidation loans. In fact, over 52% of people with $6,000+ in credit card debt have successfully consolidated their debts.
Debt Consolidation and Credit Scores
Every time you open a new credit card or personal loan, your FICO credit score lowers.
While that may sound unfair, it’s simply how the FICO scoring system works.
Here’s why: new loans and credit applications result in a “hard inquiry” on your credit report, which affects your FICO score.
Plus, all new credit products (i.e., newly opened accounts) lower your “average account age,” which in turn lowers your total FICO score.
Here’s the good news: the scoring drop is temporary. As you make payments on time, you will continually increase your FICO score.
It’s a short-term cost for long-term success.
Tackling debt is a marathon, not a sprint. While the process requires patience and strategy, it always rewards consistency.
Making payments on time protects your future—and boosts your credit score.
And with the right debt consolidation loan, you’ll position yourself for even greater success.
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