While recent studies have shown that the problem is decreasing faster than ever before, many Americans still struggle on a daily basis with individual debt.
Debt can include anything from an underwater mortgage loan where a homeowner owes more money than their house is worth, to multiple credit card debts, where a consumer can’t resolve one, two or more lines of credit due to inflated interest rates. Whatever the reason, debt can snowball into a mountain of financial problems that may seem impossible to dig out of.
Similar to personal finance programs like credit repair, debt consolidation is an effective option for anyone seeking a solution, no matter how big or small their debt amount is: secure a lower interest rate, secure a fixed interest rate, or consolidate debt for the benefit of servicing just one loan versus several.
A debt consolidation loan allows a debt-ridden borrower to consolidate — or combine — all of their debts into one single loan. This type of debt relief gives a person in debt the opportunity to better manage their finances by concentrating it into one place, instead of juggling several loans at once, each with different interest rates, terms of payment and payment amounts.
To counter these factors, a traditional debt consolidation loan will offer lower interest, resulting in lower payments for the borrower to get their debt under control more quickly. Here, a borrower works with a new lender who takes over the new loan from previous lenders.
Credit card debt consolidation is one example of how a person can turn around their financial situation. If you’re in debt on two or three credit cards, each of which comes from a different credit provider, carries different interest rates, and has varying payment terms, credit debt consolidation involves grouping all those debts into one of many debt consolidation programs on the market, allowing the consumer to pay off the total debt at more reasonable terms and rates.
Another popular, effective form of debt consolidation is used towards paying off federal student loan debt.
Taking into account your lending options for consolidating debt is an important step to eliminating financial problems. However, before taking out a new, consolidated loan, there are other ways to free yourself from debt and prevent it from happening again:
1. Work with your creditors. Will your credit card company or mortgage provider be willing to draft an amended payment plan for you? Look out for your finances in advance — if you’ve fallen behind on credit card payments and are in danger of debt, for example, seek out help from your creditors before money problems snowball into debt.
2. Change money habits. Financial experts like Dave Ramsey promote responsible money behavior as a way of preventing debt. Consolidate the way you spend before needing to consolidate your debt. Devise a budget, cut back on expenses where you can, and get our of debt before it starts.
Part of researching how a debt consolidation loan can work for you is to become proactive in defining the interest rate, terms and monthly payments that will work in your own individual budget; what works for one consumer may not for another.
Using a loan calculator can be an indispensable tool for managing your finances and preparing them before seeking a debt consolidation loan and canceling out debt forever.