Mortgage Blog

How does Debt Consolidation Work?

December 30, 2018 | Posted by: Jatinderbir Singh Bajwa

By combining multiple loan payments into a single payment, debt consolidation allows people to pay off their debt through a management program. Doing so can be especially useful on debt with high interest rates such as on a credit card. Your monthly payment can be lowered by reducing the interest rate on your payment, making it easier to pay off your debt. Multiple bill payments with various due dates can become overwhelming and difficult to keep up with for many consumers. Debt consolidation allows you to make one payment, one a month for all of your outstanding debt.

 

There are two types of debt consolidation: signing up for a debt management program or taking out a loan. The type of consolidation option that works best for you will depend on your financial situation.

 

Debt consolidation is also called bill consolidation or credit consolidation. Regardless of what you call it, consolidating debt can be an effective way to get rid of your debt, save you money on interest, and increase your credit score - all of which are needed to live a better, less stressful life.

How does it work?

By reducing monthly payments and lowering the interest rate on your debt, you can pay off your creditors much more effectively. The first step you should take is by calculating the amount you pay on your credit cards each month and the average interest rate on those cards. You can use these numbers as your base for comparison purposes. Your second step should be to add up your monthly expenses on necessities like housing, utilities, transportation, and food. Lastly, determine how much you have left after debt repayment and buying needs.

 

For some, there is enough money left to manage their debt as long as they organize their budget better and stick to it. Doing this becomes more difficult when people fall behind on their other bills as makes them become disorganized and lack motivation. A debt consolidation loan or management program can help them become organized and stay motivated. These options streamline the debt repayment process and allow you to track your progress.

Debt Consolidation with a Loan

A traditional way people consolidate their debt is by turning to a bank, credit union, or online lender to combine their debt into one loan. Just one payment each month is required, and an interest rate is negotiated with the lender. Typically, the repayment period for this type of loan is three to five years.

 

Your credit score plays a significant factor in determining your interest rate for this loan. If you have been falling behind on your bill payments, then your credit score has likely taken a hit. If the interest rate you are offered for a debt consolidation loan is not lower than the average interest you are already paying, then this may not be the best option for your situation. Ideally, the benefits of taking out a debt consolidation loan are both a single payment and a lower interest rate.

Debt Consolidation without a Loan

If you find that consolidating your debt with a loan does not offer you many benefits, it is still possible to do so without a loan. There are debt management programs available where an agency works with credit card companies to reduce your interest rate and monthly payments. You would send one monthly payment to the agency who would then distribute it to each creditor.

Should I consolidate my debt?

If you are unsure whether debt consolidation is the right option for you, contact Avon Financials. We can examine your financial situation, walk you through debt repayment options, and find the best one for you.  

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