How to Consolidate Debt

Four Methods:Obtain an Unsecured Personal LoanObtain a Secured Loan by Offering Property as CollateralObtain a New Credit CardWork through Consumer Credit Counseling Services

Debt consolidation is the process of using a single large loan to pay off multiple smaller debts. This allows the debtor to make a single regular payment, rather than several smaller ones. If the interest rate on the new loan is lower than that on the previous ones, this can save the debtor money on his or her monthly payments. If used wisely, debt consolidation can be a lifeline. However, if misused, consolidation can make bad debt even more difficult to manage. See Step 1 below to start learning how (and when) to consolidate your debt.


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    Know when debt consolidation is (and isn't) appropriate. Debt consolidation can be a godsend to someone who's in dire financial straits. It can even be useful for someone who isn't in danger of financial catastrophe by allowing him or her to roll many debts into one convenient payment. Generally, for people in difficult financial situations, debt consolidation is appropriate when it allows a debtor to avoid bankruptcy by reducing his or her payments to reasonable levels. If you are able to secure a loan with a lower interest rate than your existing debts, debt consolidation may be a good choice for you.
    • However, if you're financially struggling and you're not able to secure a loan with lower interest, debt consolidation isn't a good idea, even if it makes your numerous monthly payments into one single, convenient one. This is especially true if you're considering using a commercial debt management service, as these usually come with their own associated fees.
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    Understand the limitations of consolidating your debt. Debt consolidation isn't for everyone. Understand that, while debt consolidation can make month-to-month payments smaller, it also has disadvantages. Before deciding on a debt consolidation plan, consider the important facts below:
    • While consolidating your debt can lower your monthly payments, it does not change the overall balance of your debt. In other words, you will still owe the same amount of money after you consolidate your debt as you did before - you'll just pay less in interest per month.
    • If your consolidating loan has a lower interest rate than the debts it replaces, this usually means it will have a longer repayment schedule. Because of this, it's possible to actually pay more money overall with a consolidated loan than without one.
    • Depending on how it's used, debt consolidation can damage your credit scores. Applying for any type of loan can cause a small, temporary dip in your credit scores, but if you use a consolidation loan to, for instance, pay off and close multiple credit card accounts, the damage can be more significant and longer-lasting, as this can max out your credit utilization.[1]

Method 1
Obtain an Unsecured Personal Loan

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    Contact a bank or other lending institution. One way to consolidate your debt is to use a bank loan or a loan from another type of private lender. Loans come in two types - secured loans, which are tied to an asset like a house or car, and unsecured loans, which are not. Simple, direct personal loans, as described in this method, are unsecured loans. These types of loans are available through numerous banks and commercial lenders, but also "under the table" from family and friends. Your first step should be to contact prospective lenders and explain your situation.
    • Each lender you contact should be able you to tell you whether you're eligible for a loan, and, if so, should tell you the loan's interest rate. You will want a loan with as low of interest as possible - it must at least be lower than the rates on your current debts to be "worth it".
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    Realize that a bad credit score can limit your options. Your credit score is based on your financial history and is essentially a "grade" of your financial stability. Nearly all commercial lenders will perform a credit check before agreeing to give you a loan. If you have a history of bad financial decisions, you may be unable to obtain an unsecured personal loan from a commercial lender.
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    Borrow from family and friends cautiously. Getting an "under-the-table" loan from a friend or relative can be quicker and easier than getting a personal loan from a commercial lender, but it's far from risk-free. Being in debt to someone who's close to you can change your relationship with this person by creating a power dynamic that didn't previously exist. It can make interactions with this person tense or awkward, especially if you're having difficulty paying off the loan. Additionally, because informal loans are difficult or impossible to legally enforce, disputes over the loan can become long and messy. As a general rule, only turn to family and friends for loans as a last resort.
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    Agree to a low-interest loan and stick to its repayment schedule. Unsecured commercial loans often (but not always) have lower interest rates than credit cards, while the interest rate of a loan from a friend or family member is decided by that person. If you can get a low-interest loan that lowers the size of your monthly payments, take it. For instance, if you have multiple maxed-out credit cards, it's wise to consolidate the relatively high-interest credit card payments under one low-interest personal loan.
    • Once you've consolidated your debts under a new loan, it's imperative that you make all of your new loan's payments on-time. Late or missed payments can lead to legal action or bankruptcy.

Method 2
Obtain a Secured Loan by Offering Property as Collateral

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    Contact a bank, credit union, or lender. Secured loans are type of loan that uses a high-value piece of property (most commonly a house, but sometimes a car or another valuable piece of property) as collateral. In other words, if the loan can't be repaid, the lender is allowed to sell your property to raise money to repay the loan. Because the loan is attached to the value of the property, secured loans are a "safer bet" for the lender, which means they typically have relatively low interest rates compared to other types of loans. To see if you qualify for a secured loan, contact local lending institutions and the credit holders who hold the loans on your house, car, etc.
    • Don't overlook credit unions, as these can sometimes offer better rates than banks and other lending institutions.[2]
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    Assess the equity of your property. Equity is the difference between the market value of a piece of property and the cost of all outstanding balances associated with the property. In a secured loan, the lender uses the equity of your property to insure the loan. Thus, to get a secured loan, your property must have a sufficient level of equity. The equity of your home, car, etc. increases as you make payments against the outstanding balance of the property or as the property appreciates. The greater your equity, the larger your secured loan can be and the more debt you can consolidate.
    • Determining any value that your home has gained through appreciation may require the services of a certified appraiser.
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    Make all payments on the secured loan. Though there are usually certain approval requirements for secured loans, these can be easier to meet than the requirements for other types of loans because your property serves as insurance for the loan. Don't let these low entry requirements entice you into a secured loan you can't reasonably expect to pay off, as the consequences for failing to pay back a secured loan can be dire - you may be left without a home or car. Be sure to make all payments on a secured loan on-time to avoid the loss of important or cherished property.
    • Many secured loans have a fixed period - for instance, ten years - for repayment of the loan. Some loans may offer extensions, while others may not.

Method 3
Obtain a New Credit Card

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    Search for low-interest credit card options. Credit cards usually have relatively high interest rates even when compared to unsecured loans from banks. However, if you have good credit history, you may be eligible for exceptionally low-interest credit cards. If so, you can use this new credit card to pay off high-interest debts. To start, shop around for credit card offers that have low interest rates - you may want to look online or to contact credit card companies with whom you already have a good history.
    • As with the methods of consolidation above, you'll want an interest rate that's lower than the interest rates on your current debt.
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    Choose a credit card with a suitable credit limit. Credit cards have limits to the amount of money they allow you to spend. To effectively consolidate your debt, your new credit card should have a credit limit that's large enough to pay off all of your current debts. This way, after you do so, you'll only have to make one payment - the one on your new credit card.
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    Look for cards with 0% initial interest periods. Some credit cards offer an initial period during which interest payments and/or balance transfer fees are very low or are waived entirely. These cards are ideal if you are able to pay all (or nearly all) of your debt off during this low-interest period. If you can, sign up for one of these cards and pay off the balance prior to the expiration of the introductory period to save money that you would otherwise spend on interest.
    • Pay attention to the fine print of your credit card agreement - often, cards with initial 0% interest periods will immediately begin to incur high interest at the end of this period.

Method 4
Work through Consumer Credit Counseling Services

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    Choose a reputable, low-fee credit counselor. Though not a loan or credit extension, consumer credit counseling services allow individuals to pay all of their debts in one monthly payment at a lower interest rate than otherwise. Both nonprofit and for-profit services are available. Both (ostensibly) consolidate your debt into one payment by negotiating with your lenders on your behalf to secure a more forgiving repayment plan. However, some credit counseling agencies prey upon debt-stricken individuals by charging exorbitant fees for services that can be obtained for cheap or free elsewhere. Entering an arrangement with a predatory credit counselor can make a difficult financial situation even worse, so be cautious when picking a credit counseling service.
    • In the United States, the Department of Justice's Trustee Program provides a state-by-state list of government-approved credit counseling services.[3]
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    Make regular payments to your credit counselor. Credit counselors negotiate with your debt holders to obtain a more forgiving repayment plan. When your debt has been consolidated in this way, you pay your credit counselor every month, rather than paying your creditors directly. Your credit counselor then distributes your money to your creditors according to the repayment plan that has been negotiated.
    • While this monthly payment is often lower than your previous debts required, often, the repayment schedule when using a credit counselor is longer than with traditional forms of debt, which means you may pay more money in the long run.
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    Be prepared for a negative mark on your credit history. Credit counseling may have a negative impact on your credit score because it signals to future creditors that you had difficulty managing your debt. However, the effects of credit counseling are still far better than those of bankruptcy, so entering into a debt management plan with a reputable credit counselor is almost always a smart choice if it allows you to avoid declaring bankruptcy.
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    Use credit counseling only when necessary. Individuals who are unable to obtain a loan any other way will benefit the most from consumer credit counseling services. Because of the long repayment schedules and various fees associated with credit counseling services, generally, the other options in this article are preferable to enrolling in a debt management plan from a credit counselor. Thus, be sure to pursue the other options first if they are within your means.

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Categories: Credit and Debt