Debt Consolidation Manual

Consolidate your debts with success!

What is debt consolidation?

It is the action of amalgamating all debts into a single, combined debt.

A practical example:

  • Let’s say that you have two college student loans and a bank loan.
  • You might use debt consolidation to consolidate (combine) these three debts into one loan.
  • This means that the new consolidation loan would be of an amount precisely equal to the sum of all three initial loans.

Is there a difference between debt management and debt consolidation?

Yes – and it is a very big difference. Some companies call themselves “providers of debt consolidation” when they are in actual fact companies dealing in debt management.

By trading off of the reputable tag of debt consolidation, some companies take advantage of those who do not know the difference.

  • Debt management companies take a percentage or fee from consumers for doing the same actions (i.e. taking a larger loan to pay off and cover numerous smaller ones, or contacting creditors to make repayment proposals) that consumers can do alone and without paying extra.
  • Debt consolidation is a legitimate way for consumers to manage their debt. There is no charge for consolidating debt beyond the interest incurred by a large loan to pay down smaller debts. However, it is important to understand fully what it involves. This guide will show you everything you need to know to consolidate your debts yourself, for free.

How does free debt consolidation work?

Free debt consolidation can be approached in several ways, each with their own pros and cons. Some of the most common paths of debt consolidation are:

OPTION 1: Standard debt consolidation loan

This is the most utilized for of debt consolidation. It involves:

  • Approaching a bank, credit union or a peer-to-peer lender
  • Asking for a loan to consolidate your debts into a single loan.

Is this best for me?

This method is the most appropriate for those who have debt spread over many sources such as credit cards and small loans.

The downside

Consolidating in this way can sometimes mean paying more overall. Although it may lower interest and monthly repayments to create a more manageable repayment schedule, the total amount repaid over the term of the consolidation loan may be higher.

What’s the benefit?

The interest rate of the consolidation loan is often much lower than the combined interest for the smaller debts.

OPTION 2: Balance transfer offers

Another popular method is to use a credit card balance transfer as a way to consolidate debt. It involves:

  • Moving all of your credit card debts from man cards to one single card
  • Benefitting from an introductory interest period where no interest is paid for a set time.

Is this best for me?

If you want to make a real effort to pay off all of your credit cards within the 0% interest period, this is a great way to make huge savings on interest and reduce the capital faster.

The downside

Beware – if you don’t pay down the entire balance before the end of the period, all of the accrued interest will be added to the account.

What’s the benefit?

The interest free period could be anything from 6-18 months depending on the introductory offer from the balance transfer credit card company.

OPTION 3 – Home Equity Loan

This method of debt consolidation is available to people that have a mortgage. It involves:

  • Borrowing against the value of your house, condominium or apartment
  • Using the equity from that loan to pay down your other debts, such as credit cards or smaller loans.

Is this best for me?

If you have considerable debts (more than $50,000), this is a good way to pay these off in one fell swoop.

The downside

Be careful, as borrowing against your home means that should you fail to repay your home equity loan, the lender has the authority to foreclose on your property.

What’s the benefit?

Home equity loans usually have much lower interest rates than standard personal loans, credit card debts or other kinds of loans.

OPTION 4: Student loan consolidation

A student loan debt consolidation is different to regular debt consolidation because it involves:

  • Borrowing directly from the federal government, rather than a private lending institution or a bank

Is this best for me?

Students and graduates tend to have very large debts these days, so this is obviously a sensible option for those who will be struggling to repay them without some form of consolidation or assistance.

The downside

Remember that student loan debt is much harder than other forms of debt to discharge in bankruptcy. The government may be able to garnish your wages if you default on federal student loans or federal student consolidation loans.

What’s the benefit?

The federal government offers low interest rates and flexible repayment schedules to ease the burden on graduates with high debts and low wages.

A final word of advice

Remember that payday loans have higher interest rates than most standard forms of loans and should be prioritized for repayment. Each state has its own rules on what action can be taken against a consumer who defaults on a payday loan. Borrow responsibly and keep one step ahead of debt – short term borrowing is a short term only solution.

Click here to apply for an emergency payday loan.

 

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