The bills are piling up and you’re behind on payments to multiple creditors. You make monthly payment after monthly payment, but you’re just paying on interest, not the principal.

Debt Consolidation might be a good option to consider. Yet, many question whether it’s the right choice for them, given their unique circumstance.

In today’s blog, Groce & DeArmon, P.C., experienced bankruptcy lawyers in Springfield, Missouri, answer the most common FAQs on debt consolidation.

What is debt consolidation called?

Be it debt management or debt refinancing, all of these involve the process of taking out one loan to pay off multiple loans. 

How does debt consolidation work?

Most offer a fixed interest rate, which means the payment remains the same each month. 

You can consolidate your debt in two ways: 

• Fixed-rate debt consolidation loan. (requires bad or fair credit)
• 0% interest, balance-transfer credit card. (requires good or excellent credit)

What kind of debt can be consolidated?

• Home equity loans 
• Student loans 
• Credit card debt 
• Payday loans 
• Personal lines of credit
• Auto repossession overage fees 
• Hospital or medical bills 
• Backrent 

What debt consolidation loan types are there?

Debt consolidation comes in two forms: secured and unsecured loans. 

Unsecured loans are debt consolidation loans that the lender uses if he is confident you’ll pay back your debts, after checking your creditworthiness. 

Secured loans are given when the lender isn’t sure you’ll be able to pay them back. Secured loans require that you offer up collateral, often your home or your car. 

 

What are the pros and cons of debt consolidation?

Pros: 

• You’re able to better manage your finances by having a single debt payment to make.
• It gives you hope. Constantly paying minimum monthly payments can make it feel like you’re not making any progress on your debt. With a single debt, you simply have to steadily chip away at your monthly payments. 
• You end up paying less per month than you used to. This means you can save more money in the short term and long term. 

Cons: 

• With a bad credit history, debt consolidation is difficult to obtain.
• With a poor credit score, you end up not qualifying for good loans to benefit from debt consolidation.
• It’s not a solution. Without changing financial habits and better management of personal finances, debt consolidation will not prevent you from returning to being heavily indebted to numerous creditors. 
• There could be additional unforeseen fees, like loan origination, closing costs, balance transfer, and annual fees.

Is debt consolidation right for me? 

Consolidation is ideal if you owe high-interest debts to multiple creditors. Consolidating can reduce the interest you pay while stretching the length of the loan out.

Is debt consolidation a good or bad choice?

If you have poor credit, you’ll likely be paying a higher interest rate when you consolidate the debt. High enough that you’d be better off sticking with what you have or declaring bankruptcy and wiping the slate clean, as it were.

Sadly, this often means that those who would otherwise benefit from debt consolidation are unable to take advantage of it.

Is a balance transfer the same as debt consolidation?

Debt consolidations involve large sums of debts consolidated into one debt. Whereas balance transfers from credit card debts can be small amounts.

What’s the difference between credit card refinancing and debt consolidation?

They are different words for what is effectively the same thing. Both involve taking the debt you owe and consolidating it into a new monthly payment plan.

What’s the difference between debt consolidation and debt resettlement?

Debt resettlement is a negotiation with the lender to settle the debt. Consolidation is when multiple debts are negotiated to be put into a single payment. 

Does debt consolidation affect your credit score?

Debt consolidation can affect your credit score negatively, although temporarily. Consolidating your debt involves checking your credit score which, inevitably, hurts your overall score. 

Hire Groce & DeArmon for Debt & Bankruptcy Assistance

Our expert legal counsel can help you get through your bankruptcy, repossession, or foreclosure. Visit us online for a free consultation, or call us at 417-862-3706 to learn more.