Debt Consolidation – What You need to Know
You’ve heard about debt consolidation, and wonder if it can help you get control of your debt. If you owe several debts, the answer could be “yes,” but there are considerations. Here’s what you need to know.
What: Debt consolidation is the process of replacing multiple debts with one loan or repayment program through a bankruptcy court or credit counseling service.
Why: Debt consolidation can simplify your bill paying tasks and may also reduce the interest rates you’re paying on multiple accounts. This can help you pay off debt faster.
How: A personal loan or debt consolidation loan through a financial institution may also be called a signature loan. If you have good credit, you may qualify to borrow enough to consolidate your bills at a lower interest rate, which means that your loan payment could be less than the total of your monthly payments to creditors.
One drawback of a debt consolidation loan is that it helps you organize your debt, but it doesn’t eliminate your debt. If you don’t get help with budgeting, you risk falling into more debt if you continue to use credit cards or consumer loans.
Home Equity Loan
Homeowners may qualify for home equity loans or lines of credit that can be used to consolidate debt. This is risky as it reduces your home equity and if you fail to repay a home equity loan, the lender can foreclose and take title to your house.
Chapter 13 bankruptcy
This type of bankruptcy allows you to pay off a fraction of your eligible debts through a court-approved repayment plan. Filing bankruptcy costs plenty in legal fees and appears on your credit reports for seven to ten years.
Another option is debt consolidation through a credit counseling service. Credit counselors help consumers pay off debt through repayment programs called debt management plans. Credit counseling services offer additional benefits including budget counseling and can usually arrange for creditors to reduce interest rates and waive some or all fees.
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