Solving Your Debts With Debt Consolidation Loans

Once you fall into debt, it can be a daunting challenge to dig your way up. If you’ve already missed payments or you have accounts that have gone into collections, then you may be facing threatening calls and a rapidly falling credit score. This can hurt your chances of getting approved for a loan in the future, can raise the cost of insurance, increase interest rates, and cause you general anxiety and stress.

Thankfully, there’s an easy way to take care of your debt and replace it with easy, affordable monthly payments through debt consolidation. This article will explain what debt consolidation is, how it works, the different types of debt consolidation, and how to consolidate different types of debt. Let’s take a look!

What Is Debt Consolidation?

Debt consolidation is a way of consolidating your debt into a single loan or a single monthly payment. It’s typically used when you owe money to multiple creditors, but it may also be used if you’ve fallen behind on a single loan or if you want to reduce your interest rates on a loan.

How Debt Consolidation Can Help You

Debt consolidation can help you in the following ways:

  • It can simplify payments by reducing the number of creditors you owe.
  • It can provide you with more favorable interest rates.
  • It can reduce your monthly payments.
  • It can stop late payments from building up on your credit report.
  • It can give you a fresh start on an old debt.

For example, let’s just say you have two separate $5,000 loans from two creditors ($10,00 total). Your interest rate is high, you’re falling behind on payments, and you still owe a collective $8,000 on the loans.

You can approach a lender and ask for a consolidation loan for $8,000. Once you get the money, you can immediately pay off the two debts you previously owed. Now, you’ll just have to make payments on a single $8,000 loan to the lender who helped you consolidate.

Your interest rates will likely be lower, your monthly payments more affordable, and you’ll no longer receive late penalties for being behind on two separate loans. It sounds like a win-win situation, right?

What Type Of Debt Can You Consolidate?

Almost all types of legitimate debt can be consolidated. Take a look at the chart below to see if your debts can potentially qualify for a debt consolidation loan or repayment program.

Debt Consolidation LoanType Of Debt
Credit consolidation or unsecured consolidationGenerally includes:

● Personal loans

● Credit card debt

● Old medical bills

● Payday loans or title loans

● Old collections accounts

● Gas cards or charge cards

Private student loan consolidationYou can use private student loan consolidation to pay off both federal and private student loans (if applicable).
Federal student loan consolidationAllows you to consolidate student loans borrowed from the federal government.
Auto loan consolidationAllows you to consolidate loans taken out to pay for automobiles and recreational vehicles.
Installment agreement consolidationAllows you to consolidate debt owed to the IRS or state back taxes.

As you can see, most types of debt can be consolidated except a mortgage. In order to “consolidate” a mortgage on a home, you’ll usually need to apply for re-financing. However, that’s another topic for another day. This article is geared towards consolidating traditional debt owed to lenders and creditors.

How To Consolidate Your Debt

Are you thinking of consolidating your debts? There are two established methods that you can use to consolidate your debt and get your payments back on track:

  • Apply for new financing (debt consolidation loan).
  • Negotiate a debt consolidation plan with a debt consolidation agency.

Each method has its own perspective benefits, and drawbacks that you will want to consider before you make a final decision. Below, we’ll break both of them down so that you can make the most informed decision about what’s best, depending on your personal credit score and debts.

Method #1- Receive New Financing

The easiest and most straightforward method of consolidating your debt is to apply for new financing with a debt consolidation loan. Essentially, you’ll sit down with a bank or a lender, discuss your current financial situation, and show them the debts that you would like to consolidate.

Then, they’ll look at your interest rates, how much your monthly payments are, what your income is, check your credit score, and then decide whether or not they can approve you for a debt consolidation loan based on the information provided and your trustworthiness as a borrower.

Once you’re approved for your debt consolidation loan, you’ll receive a check deposited into your bank account. In some cases, the consolidation lender will pay your creditors directly to ensure that the loan is being used correctly.
Once your old creditors are paid in full with your debt consolidation loan, you’ll only be required to make a single monthly payment to your consolidation lender. Most of the time, you’ll find that your single monthly payment is more affordable than making all of the other previous monthly payments separately.

You’ll probably also get your consolidation loan at a far lower interest rate than your previous loans. This means that the total amount you pay in the long term will be significantly less than you would have otherwise paid.

The one downside to a debt consolidation loan is that the lender will have to perform a hard pull on your credit. This can slightly damage your credit score, especially if you’ve applied for a number of other loans in the past six months. In general, the better your credit score is, the more likely you are to get a debt consolidation loan at a favorable rate.

Method #2- Debt Consolidation Repayment Plan

The second method is less commonly used, but it’s an excellent way to get back on track with your monthly payments if your credit isn’t high enough to receive a debt consolidation loan or if you don’t want to apply for new financing. It’s also a great method if you’ve fallen behind on payments and you’re in danger of being sent to collections. This method involves working with a debt management or credit repair agency.

To start with this method, you’ll consult with an agent who will take account of all of your debts that you want to consolidate. Then, they’ll contact each of your creditors individually and say that you would like to set up a repayment plan in order to pay the debt. Often, the agency will be able to negotiate a lower monthly payment or remove late penalties.

Once the details of the repayment plan are all worked out, the agency will handle all of the future payments to your creditors. You’ll be required to make a single monthly payment to the credit/consolidation agency. Then, they’ll divide your payment across all of the creditors you owe money to, taking a small percentage in return for their services.

Now, let’s take a few minutes to discuss how to pay off different types of debt using different types of consolidation loans.

How To Consolidate Credit Card Debt

Credit card debt is debt that you owe on a credit card. This could be from an old credit card that you’ve since closed down or an amount that you’re unable to cover with your minimum monthly payment.

Credit Card Balance Transfer

This involves receiving new financing for a new credit card. Once you get the new card, you’ll transfer the balance of your new card to pay off the old card.

Personal Loan

You can apply for a personal consolidation loan from a bank or a lender.

Home Equity Loan

You can leverage your home or apply for a reverse mortgage to receive a loan to pay off credit card debt.

Repayment Program

You can contact a credit repair agency to help you set up a repayment plan at reduced interest rates and eliminate penalties.

How To Consolidate Student Loans

Student loans are one of the most common forms of debt. Many young teens take out tens of thousands of dollars to go to school and then find themselves unable to pay it back when they graduate. Here are some of the best ways to consolidate student loans.

Private Debt Consolidation Loans

If you have private or federal student loan debt, then you can apply for a private debt consolidation loan through a bank or lender to pay off your loans and provide you with a lower interest rate.

Federal Debt Consolidation Loans

If you owe student loan money to the federal government, then you can apply for a federal debt consolidation loan. This can help you pay off your original federal student loan at a lower interest rate.

How To Consolidate Tax Debt

If you owe back taxes to the IRS or your state’s department of revenue, then you can consolidate it to prevent a tax lien from being placed on your accounts.

Repayment Plan With The IRS

If you owe money to the IRS, then you’ll need to contact them directly and set up a repayment plan. Once you set up a plan, interest rates and late penalties may be removed from the past due balance.

Personal Loan

If you owe money to the IRS or the state, then a personal loan may be the best way to consolidate your debt and stop the late penalties.

Debt Consolidation: Special Cases

Here are a couple of additional cases in which you may need to apply for a debt consolidation loan.

Military Debt Consolidation Loan (MDCL)

If you purchased a house using a VA loan, you may be eligible for an MDCL loan. These loans leverage your home to provide you with a low-interest debt consolidation loan. While these are effective and easier to get approved for, you are risking your home, so make sure you weigh the risks beforehand.

Medical Debt Consolidation

Past medical debts don’t weigh as heavy on your credit score as they used to. However, suppose you find yourself facing piling interest rates and late fees. In that case, you may want to consider getting a debt consolidation loan for medical bills that were unpaid by your insurance.

Payday or Title Loan Consolidation

Payday loans and title loans are short-term loans that often come with incredibly high-interest rates. If you’re unable to pay them off quickly, then you could end up paying double or even triple the amount when all is said and done. If this is the case, then your best bet is to apply for a debt consolidation loan before you dig your hole any deeper.