When making decisions about your finances, it’s important to consider your options. After all, if you’re going to take action, it makes sense to choose the best solution for your unique situation.
For example, if you’re considering debt consolidation, you may not be 100% clear on the specifics. You might know that it involves combining several debts into one loan, but what kind of debts? Also, what are the pros and cons?
To help you get a better understanding, here are three questions to ask yourself about debt consolidation:
1. How does debt consolidation work?
Debt consolidation involves taking out a new loan to pay off multiple outstanding balances. In other words, you are replacing multiple loans with one. For example, if you have five different debts with a total outstanding balance of $8,000, you could apply for one debt consolidation loan for that amount. If approved, you can pay off all five balances at once and make only one monthly payment going forward.
Three options for debt consolidation include:1
- Personal loans
- Home equity loans
- Credit card balance transfers
The type and amount of personal debt you have may influence what type of loan you choose. To learn about consumer debt in America, explore our infographic comparing personal debt across the country.
2. Is my debt eligible for consolidation?
Lending requirements vary, but many banks, credit unions and loan companies offer consolidation loans for both secured and unsecured debt.2 If you have both types of debt, it is possible to combine them all into one loan.3 The difference between a secured and unsecured loan, or secured and unsecured debt, is whether it is backed by collateral or not.
Common forms of debt accepted include:4
- Credit card
- Medical bills
- Personal loans
When applying for a debt consolidation loan, some companies may evaluate your credit score, loan amount and other factors before making a decision. If you’re interested in learning more, read our article on how to increase the chances of getting a loan approved.
3. What are the pros and cons?
As with most debt solutions, there are positives and negatives that can vary per person. However, if debt consolidation is the best option for your financial situation, you might be able to maximize the advantages and minimize the disadvantages.
Here are some potential pros and cons to consider:
- Pay several outstanding balances off at once
- Fixed interest rate and monthly payment
- One payment to one lender
- Loan origination fees and prepayment penalties
- Longer term to repay debt
- Could pay more in interest over the life of the loan
For more information, please read our article on what you should know about debt consolidation.
Make the best decision for you
If you’re considering debt consolidation, it’s important to be clear on all of the details and potential outcomes. Hopefully, this information will help you make an educated decision on whether debt consolidation is the best option for you.
1. Debt.org. “Debt Settlement vs. Debt Consolidation.” Debt.org. https://www.debt.org/settlement/vs-consolidation/ (accessed May 15, 2017).
2. Consumer Financial Protection Bureau. “How can I safely consolidate my credit card debt?” ConsumerFinance.gov. https://www.consumerfinance.gov/askcfpb/1861/how-can-i-safely-consolidate-my-credit-card-debt.html (accessed May 23, 2017).
3. Investopedia. “How can I consolidate my unsecured debt?” Investopedia.com. http://www.investopedia.com/ask/answers/110614/how-can-i-consolidate-my-unsecured-debt.asp (accessed May 23, 2017).
4. Debt.org. “Debt Consolidation.” Debt.org. https://www.debt.org/consolidation/ (accessed May 15, 2017).