Q: We hear about debt consolidation a lot. What is debt consolidation?
A: Debt Consolidation loans are used to pay off other outstanding debts, so instead of continuing to pay multiple payments each month, you only have one.
Q: What is the most common type of debt consolidation loan?
A: The most common type of debt consolidation loan is an unsecured personal loan, but debt consolidation can also be accomplished through a home equity loan, or even transferring credit card balances from high rate cards to a lower rate credit card. Once you have consolidated your debts, even though the total amount you owe is still the same, your monthly payments are usually lower because the loan is now a fixed payment and your interest rates are lower.
Q: Once you consolidate your debts, what happens to the old debts?
A: It really depends on what kind of debts they are, but overall your outstanding debts are paid off in full, so they will reflect on your credit report as such. For example, with a credit card if you close the card, it will reflect on your credit report that the debt has been paid and the card is closed. If you are going to keep the card open, then it will report with a $0 balance unless you begin to charge your card again. As for installment loans, like a car loans, it will report on your credit report that it has been paid and is closed. These changes will affect your credit score differently based on your overall credit report.
Q: Is there ever a time when debt consolidation is a bad idea?
A: Debt consolidation is best for someone who is paying high interest rates on multiple debts or is struggling to pay all their debts on time every month. There are definitely situations where debt consolidation isn’t needed. For example, we have seen where the interest rates that people currently have are better then what we can offer through debt consolidation, when we see this we help you structure your finances to pay off the debt quickly, usually through setting up a budget and a payoff plan. Overall, when you consolidate your debt you should end up with a lower monthly payment and with lower interest rates. If this is not possible then debt consolidation might not be the best option for your financial situation.