Many people turn to debt consolidation as a way to get over debt and improve their finances. Surprisingly, not many of them truly understand what debt consolidation is and how it works to their advantage. So how exactly can debt consolidation help get debt under control and what types of debt consolidation options are available?
What is debt consolidation?
Debt consolidation is essentially the act of consolidating multiple debts and paying them off by taking out a loan. Once the consumer has paid off all their creditors, they only have to manage payments for a single loan.
The key to a successful debt consolidation is dependent on two things: 1) when the debt consolidation loan they obtain is offered at a lower interest rate or a lower, fixed interest rate and 2) they can faithfully pay back the loan and become debt-free.
There are several debt consolidation options that consumers can use, depending on their debt situation and preferences. These include:
Home equity loans
To pay off their debts, people take out a loan against their home equity, which, depending on the value of the home, can be a substantial amount — enough to pay off their debts. People who choose this option have to be careful, though. This debt consolidation option requires that a lien be placed against the house. In case the consumer defaults and fails to pay back the loan, he will face foreclosure.
Balance transfer
A popular option for people who want to consolidate credit card debt is transferring the balances of different credit cards to just one card, typically a card that has a lower interest rate. This can help by lowering monthly payments significantly, making the debt easier and faster to pay. The key to using this option successfully is by paying off the debt (or at least a significant amount of it) during the introductory period when the interest rate is still low.
Credit counseling
Many agencies offer debt consolidation along with credit counseling. They negotiate lower interest rates with creditors and help schedule a debt repayment plan that will eventually pay off the debt.