How Does Debt Consolidation Work?

Debt consolidation is the process of taking out a single new loan or balance transfer credit card and using the funds to pay for multiple existing debts. You can consolidate your debt with the help of a professional team or on your own.

A professional debt consolidation company can help you identify the best strategy and loan options for the types of debt you carry, saving you headaches throughout the process. Debt consolidation can be a way to find quick loans or options for emergency loans if you find yourself in hard times. Alternatively, you can take on this research and planning yourself and open a loan or credit card directly.

Is Debt Consolidation A Good Idea?

For many people, the answer is yes. Debt consolidation can be a good way to simplify or lessen your financial burdens in a few different ways:

• You won't have to manage as many bill payments per month. By consolidating multiple of your debts into one bill, you only have to think about paying that one bill each month rather than tracking the different "due by" dates for every individual one. For those seeking hardship loans, this can be helpful to prioritize their repayments.


• You might be able reduce how much you have to pay on interest in the long-term. When deciding which debts to consolidate, compare the APR (annual percentage rate, or how much it costs you to borrow money per year) for each of your current debts with the quoted APR for a new debt consolidation loan. Consolidating high-interest rate debts into a single lower interest rate loan can help you get out of debt quicker, simply because the creditor is charging you less interest for how much you've borrowed.


• You might reduce how much money you have to pay each month. While it's smart to pay down your debt as quickly as possible, life happens. If you consoldiate your debt into a single loan, instead of making multiple payments to different creditors each month, you only need to pay one. If you're look to pay off loan quickly, some companies may have services to assist in your financial goals. Depending on the loan's terms and conditions, this can be less than the total of every other payment you were making before.

Unlike debt settlement, debt consolidation doesn't promise to reduce your total current debt, but it does offer you a way to make your financial life simpler to get a loan. Debt consolidation can also offer a way to receive a quick loan. It's also a less risky strategy; debt settlement requires you to stop paying your bills so the company can negotiate with your creditors and "settle" your debt for less, which can cause a significant hit to your credit score. If you're looking for an emergency loan or a hardship loan, debt consolidation may be your way to financial freedom as well.

While completing the final application for a debt consolidation loan will briefly hurt your credit for a few points—the lender will run a hard credit check after you've pre-qualified and want to continue the application—as long as you make payments, your credit should recover in a few months.

Secured vs. Unsecured Debts

Debt settlement companies typically only work with unsecured debts (like medical bills, personal loans and credit cards). Secured debts—those backed by collateral, like car loans and home mortgages—can sometimes qualify for debt consolidation strategies but generally won’t qualify for debt settlement strategies.