What is Debt Consolidation?
Debt consolidation is any method of combing multiple debts into one monthly payment. There are several types of debt consolidation programs, and the goal of each is to reduce the interest rate and lower the monthly payment so you can pay off the debts in 3-5 years.
There are three major benefits of debt consolidation:
- A single monthly payment– it can be hard to keep up with several debts that have several different due dates and several different minimum payments. Consolidation simplifies the process with one easy payment.
- Lower interest rate– paying off debt can feel like trying to hit a moving target. You make a payment one day, and the interest shoots the balance up the next. Lowering the interest rate will limit that damage, allowing you to make more substantial dents in your debt.
- Pay off debts faster– it takes about 20 years to pay off credit card debt by making the minimum payment. Debt consolidation will eliminate your debt in 3-5 years.
The traditional method of consolidating debt is to take out one large loan from a bank or credit union and use that money to pay off several smaller debts.
That can be effective, unless you have a less-than-perfect payment history and low credit score, which means you may not be approved for a debt consolidation loan or bill consolidation loan, as it is sometimes called. In either case, the loan you get will carry a high interest rate.
Debt can also be consolidated without a loan in the form of a debt management plan. These plans are offered by nonprofit credit counseling agencies, like InCharge Debt Solutions, and do not use credit scores for eligibility.
Like a loan, your debts will be consolidated into one monthly payment. But unlike a loan, credit counselors work with your creditors to lower interest rates. That translates into a lower monthly payment for you.