If you have a lot of debt in a number of different places, you can consolidate it by combining all of your unsecured debts into one monthly payment. Consolidating your debt can often save you money and help you pay off your loans faster. If you’re ready to learn more about your debt consolidation options, explore this overview from the experts at Cash Factory USA.
Secured Vs. Unsecured Loans
There are generally two types of loans or debts: secured and unsecured. A secured debt is one that has collateral backing. Your mortgage or car payment is typically considered secured, as the collateral is the house or car you’re paying for. Credit card debts and student loans are usually unsecured, as there is no physical collateral that can be collected by the financial institution that gave you the money in case you default on your payments. In most cases, debt consolidation companies cannot help with secured debts — only unsecured debts and loans.
Popular Debt Consolidation Options
There are a few ways that you can approach consolidating your debts. One common option is to take out an entirely new loan to pay off all of your current debts so that you only owe one financial institution a monthly payment. This is a good option for those who have varying interest rates on each of their loans. If some of your interest rates are incredibly high, you should negotiate a lower interest rate on your new loan to save money as you pay it back. You should be cautious with this route if you have student loans, as this type of debt consolidation will exclude you from receiving additional government assistance such as loan forgiveness.
Another method for consolidating your debts is to hire a debt consolidation company. They would maintain separate payments for each account, but you would pay them one flat rate that they would then divide to send to your creditors. You also have to pay them an account maintenance fee for their services.
Does Consolidation Reduce Your Debt?
The short answer is NO. Debt consolidation doesn’t lower how much you owe financial institutions and creditors. Instead, it can allow you to renegotiate high interest rates and save money that would be accruing in addition to your debt. It also streamlines payment of your debts into a single bill.
Benefits & Downsides
Consolidating your debt is mostly to help lower your monthly payment or your interest rates. It makes it a little easier to fit your debt into your budget, but sometimes it can take longer to completely pay off. You need to calculate the costs of lower interest rates for a longer span of time versus a higher interest rate for a shorter span of time to see which one saves you more money.
The debt consolidation industry can be predatory to desperate people who really need help. Carefully review any paperwork before signing and make sure you research the institution before working with them. There have been cases of companies pocketing monthly payments and leaving customers with damaged credit and bankruptcy.
You can look for accreditation with the Better Business Bureau to help you find reliable companies. You should also avoid any companies that ask for fee payment upfront or have very aggressive sales pitches.
Creating Your Own Plan
When dealing with creditors, it can be daunting to approach them directly, but you should always try to work with them first before going to a debt consolidation company. Negotiate lower interest rates if possible and create your own payment plan for consolidating your debt. Using consumer credit counseling services can help you develop a smart payment plan that balances your largest debts with those that have the highest interest rates.
If you’re ready to take charge of your finances and reach your goals, look to the Cash Factory USA Resource Center for additional advice.