A consolidation loan may also be kind to your credit score down the road.
“If the principal is paid down faster [than it would have been without the loan], the balance is paid off sooner, which helps to boost your credit score,” says Freeman.
If you have a good payment history with a bank, credit union or credit card company, asking that institution about a debt consolidation loan should be your first step.
Freeman says debt consolidation loans are most helpful for people who have multiple debts, owe ,000 or more, are receiving frequent calls or letters from collection agencies, have accounts with high interest rates or monthly payments, are having difficulty in making payments or are unable to negotiate lower interest rates on loans.Once in place, a debt consolidation plan will stop the collection agencies from calling (assuming the loans they're calling about have been paid off). The Internal Revenue Service (IRS) does not allow you to deduct interest on any unsecured debt consolidation loans.Consumers can use debt consolidation as a tool to deal with student loan debt, credit card debt and other types of debt.There are several ways consumers can lump debts into a single payment.Secured loans are backed by an asset of the borrower’s, such as a house or a car, that works as collateral for the loan.
More-traditional, unsecured debt consolidation loans, which are not backed by assets, can be more difficult to obtain.
If you need actual debt relief or don't qualify for loans, it may be best to look into a debt settlement rather than, or in conjunction with, a debt consolidation loan.
Debt settlement aims to reduce your obligations rather than just reducing the number of creditors.
Debt consolidation means taking out a new loan to pay off a number of liabilities and consumer debts, generally unsecured ones.
In effect, multiple debts are combined into a single, larger piece of debt, usually with more favorable payoff terms: a lower interest rate, lower monthly payment or both.
One method is to consolidate all their credit card payments onto one new credit card – which can be a good idea if the card charges little or no interest for a period of time – or to utilize an existing credit card's balance transfer feature (especially if it offers a special promotion on the transaction).