Consumer Debt Consolidation Explained

In a nutshell, consumer debt consolidation involves taking out a single, lower-interest loan to pay for many other, high-interest loans or debts. Debt consolidation might take the form of converting unsecured loans into another unsecured loan or, more commonly, converting unsecured loans into a secured loan. A secured loan means that the debt is secured against collateral, such as a home or a car. Providing collateral for the loan reduces the lender's risk in loaning to you, which translates into lower interest rates for you. In certain situations, consumer debt consolidation companies can even discount the amount of the loan, especially if you are in danger of bankruptcy. If this is the case, the debt consolidation company buys the loan at a discount from your creditors and can pass on some of these savings to you. To summarize, consumer debt consolidation is designed to make paying off your debts cheaper, faster, and more convenient.

Types of Consumer Debt Consolidation

There are three types of consumer debt consolidation you'll want to be aware of before you decide which one is right for you. All three types are outlined and explained below.

Home Equity Loan or Line of Credit

In this type of consumer debt consolidation, you offer your home as collateral in a loan to help you pay off your other debts. This option usually involves a tax break, too, which is one of its advantages. Home equity loans can work for homeowners who are overburdened by debt, but there is a strong risk involved. Placing your house up as collateral means that you could lose your home if you default on the loan.

Zero-Percent APR Credit Cards

If you do not own a home, you might instead look to 0% APR credit cards to consolidate your debt. Credit card companies often offer 0% APRs as incentive for you to switch credit card vendors. Of course, these introductory offers do not last forever. Usually the introductory rate expires within six months to one year. The benefits of this method include not having to pay any interest on your debts for however long the rate lasts and having your debts all in one place. However, the drawbacks of this type of debt consolidation are considerable. For one, you might not even qualify for any 0% APR offers because companies usually target people with good to excellent credit. Moreover, the low rate only remains during the introductory period if you make every single payment on time. Finally, to make a dent in your debts, you would have to pay considerably more than the minimum, especially after the 0% rate expires. Basically, for this type of debt consolidation to help you reduce your debt, you would have to continually jump from one 0% APR card to another, which can negatively impact your credit.

Consumer Debt Consolidation Loan

If you don't own a home and the 0% credit card method doesn't appeal to you, there is another option. Many companies offer debt consolidation loans with reasonable terms that can help you make your debt more manageable. You've probably seen advertisements for this financial service on the Internet. The convenience of debt consolidation loans makes them more appealing than other types of debt consolidation, and they have become fairly common as a result. Rather than paying 20+ creditors charging different rates at different times of the month, you take out one large loan and pay off all of those debts. This means you have only one loan to worry about each month. In the end, the loan ends up saving you a lot of money, headaches, and time. Remember that the terms of your debt consolidation loan depend on factors like your credit standing and whether you are able to put up collateral against the loan.

Finding a Debt Consolidation Loan

If you'd like to begin looking for a debt consolidation loan, many financial institutions offer this service. As with any service or product, getting the best deal means shopping around and getting a few quotes. The Internet is a great place to start, as many debt consolidation companies have websites with good information. Banks and credit unions are also good places to comparison shop, but the competitiveness of the online market could make Internet shopping your best bet.

Make Consumer Debt Consolidation Work for You

Finding a good consumer debt consolidation loan is the first step toward making your debt more manageable. But remember that your work doesn't end once you've found a loan and consolidated your debts. To fully reap the benefits of debt consolidation, you'll need to be disciplined in paying off your debt consolidation loan. Otherwise, you can find yourself right back in hot water again. Perhaps having all your debts in one place at a reasonable interest rate is enough motivation for you to begin paying down your debt seriously. If you feel like you might need more than that, though, then you might want to supplement your consumer debt consolidation loan with credit counseling. Credit counseling can help you pay off your debt consolidation loan responsibly and provide you with the skills and knowledge requisite to avoid getting over your head in debts again.