Carrying a lot of debt is not ideal. Just like most things, our finances aren’t isolated from the rest of our lives, and excessive consumer debt can impact more than just your finances. Once the stress of your finances starts to spill over into other parts of your life, you should consider potential debt relief options. Consolidating loans is one of those options. With that said, your understanding regarding the consolidation of loans is really important. Let’s break it down.
Consolidation of Loans: What’s the Meaning?
The consolidation of loans isn’t as confusing as it may first appear. There are two main ways to go about the debt consolidation process.
Debt Consolidation Loans
The first is taking out a debt consolidation loan. Essentially, a consolidation loan allows consumers to take out a new loan to pay off multiple creditors. After using that loan to pay off loans, the borrower (you) will begin repaying the new loan. The up-side of consolidation loans is that borrowers will only have to remember one due date to one creditor rather than keep track of multiple different debts.
Loans for debt consolidation work for some people. The key to knowing whether a consolidation loan will benefit you is whether you’re able to secure an interest rate lower than you currently hold. Otherwise, you will not save any money. Additionally, it’s important to address the factors that got you into debt in the first place. Because consolidation of loans will enable you to repay your debts (likely credit card debt), you will suddenly have a number of credit cards with a zero balance. The temptation for some to continue to spend with new available credit can be overwhelming. Such behavior can land you even farther in debt. So, is there a way to seek out consolidation of loans without borrowing more money?
Debt Consolidation without Loans
One alternative option to consolidation loans is a debt management plan. Rather than consolidating loans, a debt management plan (DMP) will consolidate your payments. This means that you won’t take on new credit card consolidation loans in the process. National nonprofit American Consumer Credit Counseling (ACCC) offers such a DMP. ACCC’s debt management program works like this:
- ACCC negotiates with your creditors to reduce interest rates and any outstanding late fees or over-limit fees rather than principal owed. In many cases, this can have the effect of reducing your total monthly obligation and the time it takes to pay off your debts.
- You make one payment to ACCC each month, and we then pay each of your creditors.
- We provide you credit counseling and educational resources to help you strengthen your credit management skills and stay on track toward a future free of excessive debt.
So, the consolidation of loans isn’t as tricky as you may originally have thought. But, if you have any more questions, please contact ACCC’s certified credit counselors at 1800-769-3571 or visit consumercredit.com.