Debt affects 8 out of every 10 Americans, and it leaves many of them uncertain of their financial future. If you are affected by debt, you might consider a debt consolidation loan. For many people who live with debt, the idea of consolidating debt and working on financial freedom is appealing. If you don’t know much about debt consolidation loan, it’s time to get to know what it means, how it works, and what it has to offer a person who lives with debt.
How Debt Consolidation Loans Work
Debt consolidations loans work simply. When you have debt, you likely have it across an array of different loans. This might encompass credit card debt across many credit cards, it might include a car loan, student loans, or any other personal loans you’ve taken out. Since credit cards come equipped with high interest rates to protect lenders from the lack of collateral associated with the credit card, they’re not always affordable to pay back.
Many people prefer to take out one big loan to consolidate their many other debts. This puts all your payments into one payment, eliminating many interest rates by combining them into only one payment with one interest rate. It makes it less expensive, more affordable, and faster to pay off debts.
Debt Consolidation Loan Options
The term debt consolidation loan is general, and there are many ways to consolidate debts into one loan. One way is to apply for a loan from your bank or credit loan. Take the money, pay off all your debts, and make the payments on time and in full each month until your debts are paid in full.
Another way to consolidate your own debt is by applying for a credit card with a long 0% APR balance transfer offer. This allows you to transfer the balance of all your cards into one payment each month without an interest rate. By working hard to pay off your new credit card, you can do it before the 0% introductory period is over and eliminate all excess payments. This works for anyone with good enough credit to qualify for a new card with a long introductory period.
Debt management plans are another source of debt consolidation. This type of plan is run by a nonprofit organization that educates consumers on proper financial decisions, as well as tips to help them avoid debt in the future and pay off debts in the present. Everyone who uses a debt management plan to consolidate their debts is required to go through credit counseling. This helps you learn how much you can afford to pay every month, how much you need to pay off your loans, and it is a good way to eliminate interest rates that increase your debt.
Debt Consolidation and Your Credit Score
There are both positive and negative effects on your credit score when you consolidate your debts. As you pay off your debt, you see your score rise. If you choose to go the route of a debt management plan, you’re going to see your score fall dramatically, but sometimes this is the only way to guarantee you have the ability to pay off your debts. The course takes anywhere from 3 to 5 years, but your score jumps significantly when you finish this plan.
It’s important to remember not to cancel every single credit card you have when you pay it off during consolidation. A significant portion of your credit score is determined based on the length of your credit history, which is determined by your oldest cards. Keep at least one or two of your oldest cards to ensure your credit history is long.
Consolidating your debt can be done in many ways, but you must understand the implications of each. If you can avoid going through a professional debt consolidation loan process, it’s a good idea to do that. Try new credit cards with no interest, personal loans, and any other method of paying off your debt as possible, but don’t shy away from a true debt consolidation loan if it’s the only option available to you. For many, it is the only option available, and it’s the only way you’re going to see your credit score rise and your debt fall over time.