Debt Consolidation – What is it?

Posted by Nikitas Tsoukalis on September 16, 2015

Debt Consolidation – What is it?

Yes, there are many misconceptions out there about what debt consolidation is. For example, many think it involves the likes of credit counseling or debt settlement, but that’s not the case. So just what is ? It’s simply the act of taking existing debt and paying it off with a new loan with one monthly payment.  

Benefits

Now that you know what it is (and what it is not), let’s take a look at some of the major benefits of it, of which there are several. These include:
  • Easier to manage: Because all of one’s existing debt will be consolidated, payments are generally much easier to manage. That’s because instead of making payments to several lenders, you now only have to worry about making one monthly payment to one lender. Remember, one of the largest factors in your FICO score is making payments on time. Debt consolidation makes this a whole lot easier to do.
  • Lower interest rates: It’s is especially helpful if you make high interest payments to lenders. One of the goals of a successful program is to do it with one, new lender at interest rates that were lower than with previous lenders. That’s when consolidating debt is really, truly worth it. This helps you save money in the long run and, ideally, pay off the amount more quickly than you would have before.
  • No negatives to your credit score: As we noted earlier in this post, many people confuse debt consolidation with debt settlement. Debt settlement is the act of negotiating a reduced balance payment amount with lenders to settle outstanding money owed. It also can take a hit on your credit score if you have to come to that. Debt consolidation is simply combining several payments into one monthly payment, ideally at one overall lower interest rate. As long as you make the one monthly payment on time, it won’t impact your credit score.
  Now that you know about it, think about whether or not you may be a good candidate for it. If you have several, smaller loans that you’re paying off at high interest rates and believe you could consolidate them into one, cheaper monthly payment, then it’s time for you to take a hard look at this option. While debt consolidation doesn’t eliminate debt, it can help people feel more confident and at ease about their financial situation based on the money that they’re ideally saving from achieving a lower interest rate. At the same time, however, it’s important for individuals who go the debt consolidation route to be cautious not to take out any more debt before the consolidated loan has been paid off. If that’s the case, then the cycle will just start all over again.