Debt Consolidation Basics

Debt consolidation means rolling all of a consumer’s debt into one loan. If a consumer, for example, owes on a few credit cards, a student loan, and a car payment, by consolidating these debts, he or she can lower the overall interest rate. When the interest rate is lower, so is the monthly payment. Depending on the number of loans outstanding and the interest on each of them, an individual can save hundreds of dollars each month (or even more) by using debt consolidation services and programs.

Why is a fixed-loan rate important?
The other major reason many consumers should consider consolidating is to change from an ARM to a fixed-rate loan. An ARM is an adjustable rate, meaning the interest on the loan can go up or down. The higher the interest, the more the monthly payment. Consumers are sometimes shocked to learn how high their rates are and the difference a low rate can make in a monthly payment! When the debt involves a fixed-rate loan, consumers can rest assured that the monthly payment will not go up. It is for this reason that credit repair service often begins with consolidating loans.

What are downsides to debt consolidation?
First, not all consumers are approved for debt consolidation programs and services, and though fast credit repair is possible in some cases, consolidation helps on a gradual basis rather than immediately. Some who are approved may not be able to secure the lowest rates. For example, a consumer who owes an auto loan of 10,000 at 15% interest plus a credit card balance of $7000 at 20% interest would not benefit by consolidating these debts at a rate of 22%! The first step is to apply and see whether consolidation is an option–and if it is, at what rates.

Consumers who are interested in applying to roll their outstanding balances together might opt to begin with credit repair counseling to ensure that this is the right option for their circumstances. A credit counselor will ask questions and then use the answers to determine a person’s eligibility for consolidation programs and applicable rates. If approved, the individual can then look at the hard numbers to compare current monthly balances to the totals he or she would pay after consolidation. From there, the consumer can determine which scenario best meets his or her financial circumstances, budgets, and goals.