If you’ve been searching for financial help, debt consolidation has probably come up more than a few times as an option to either take or avoid. Unfortunately, the term can sometimes be attached to so many different things that it is hard to figure out what getting your debts consolidated actually means. Some may tell you it is your key to being out of debt immediately, while others will say it is simply a way to move money around without making any serious change at all. In truth, consolidating your bills can go a long way toward helping you get out of debt, but it isn’t an instant cure by any means.
Definition:
At its most basic, getting your debts consolidated means applying some large sum of money toward paying off all your debts and then paying on that money instead of the smaller bills. Usually, you get this money through an equity style loan, where you’ll end up using something like your home or retirement account as collateral to create a low interest loan that can be paid off over a term that can stretch as long as you need it to. Sometimes the loan can be unsecured, though this is a less common practice since the higher interest rates on unsecured loans make keeping them financially beneficial harder.
How It Works:
Getting a loan for consolidating bills is as simple as applying the same way you would for any other loan, generally either through your bank or through a company that specializes in debt consolidation loans. The bills you will be encouraged to pay off will be high interest credit card payments, anything ready to go into collections, and generally any bill where paying the balance with your new loan will get you a lower interest rate. This generally does not include obligations that are already low interest, like car payments and student loans.
You’ll work out a payment schedule that can turn your monthly payment on the new bill into something you can manage within your budget. In some cases, this may mean making the new obligation a long term payment process that won’t get you completely out of debt anytime soon, though it will free up money if you were struggling with your smaller bills. If you pay on time every month and avoid taking out new lines of credit, you should emerge from your debt when the loan is finished being repaid.
While getting your bills consolidated won’t make you debt free, it will turn your high interest obligations into an easy to manage low interest payment. Eventually, by working with a consolidation company to create a long term plan, you can end up paying off everything you owe in a slow and steady manner while either maintaining good credit or improving fair credit.
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