Ultimate Guide to Debt Consolidation Programs

Everything you need to know about finding the right debt consolidation program

Carrying a large debt burden affects your everyday life because of the stress and responsibilities. One way to tackle the problem is through debt consolidation programs.

A recent Gallup poll found 27% of all Americans carry credit card debt, 21% student loan debt, 34% auto loans and 18% other personal loans. In particular, Gallup found that among millennials, 39% had student loan debt, 15% credit card debt, 27% auto loans and 20% other personal loans.

Total U.S. household debt balances in the fourth quarter of 2016 were just 0.8% below their peak, the Federal Reserve Bank of New York reported in its quarterly report on household debt and income. Overall debt stood at $12.58 trillion, compared to $12.68 trillion in the third quarter of 2008; however, delinquency rates are much lower in 2016 (4.8%) than in 2008 (8.5%).

Yet in the recovery leading up to 2016, the increase in debt has been driven by student and auto debt, rather than housing debt, the report’s analysis found. Housing debt (mortgages and home-equity loans/lines of credit) is 71% of total household liabilities; it was 79% at the 2008 peak.

If you are struggling to make payments on multiple loans and multiple types of loans, a debt consolidation program might be right for you. You should be aware these are not “quick fixes” and work to simplify your financial life, not make your debt burden disappear. You need to do research and ask a lot of questions before you decide to proceed.

Factors to consider 

Before you select a debt consolidation program or service for your specific needs, you should determine:

  • Your amount of debt. Most debt consolidation companies have a minimum and a maximum amount of debt they will consolidate. If you have a significant amount of debt and are a homeowner with a lot of equity in your house, your best choice may be to obtain a cash-out refinance with your home lender.
  • Fees and costs. Other than the interest rate you pay on the loan, there may be additional fees you are responsible to pay.
  • Eligibility. Not all borrowers are eligible for all debt consolidation services and loans. You may need a certain income level or credit rating.
  • New interest rate. Make sure the interest rate for the debt consolidation program you choose places you in a better financial position than your current rates. Additionally, it makes a big difference whether the interest rate is fixed or variable.
  • New monthly payments. With your new interest rate, your monthly payments should be lower. However, making a lower monthly payment for a longer-term loan isn’t always your best option. It ultimately might cost you more. Be sure to consider the length of the repayment period and interest rate to determine the full cost of the loan.

Compare debt consolidation options

When people begin talking about debt consolidation programs, they assume that means finding a company that offers debt counseling, management and settlement programs.

However, you can combine all of your debts into one consolidation loan on your own. There are different types of consolidation loans, including:

  • Secured loan. Available through your lender, a secured loan (such as a home equity line of credit) requires you to provide collateral, generally in the form of a home or car, and have a high credit score. There may be costs associated with this type of loan, such as origination fees. However, the interest rate is among the best.
  • Unsecured loan. Many banks, credit unions, and other financial institutions offer unsecured, high-interest loans that require no collateral. However, unsecured loans are generally available only to individuals with a solid income and a higher-than-average credit score.

Other types of debt consolidation options include:

  • Balance transfer loan. A popular form of debt consolidation using an unsecured loan is credit card balance transfers that allow you to consolidate other credit card debts into one. In many cases, a transfer balance offers an introductory period with 0% interest for six to 12 months.

Finally, there are also debt consolidation programs offered by debt settlement companies. This type of debt consolidation program offers borrowers:

  • Debt consolidation services. These include credit counseling, budget development, financial education, debt management, debt consolidation and debt settlement.
  • Convenient payments. One of the greatest advantages of consolidating your credit is that you end up with one convenient monthly payment allowing you more control over your financial future.
  • No collateral. Debt settlement companies don’t require collateral to secure a loan, so you don’t have to put your home or vehicle at risk. However, as with any unsecured loan, the interest rate is higher. 

The goal of all debt consolidation programs is to provide borrowers an opportunity to get back on their feet. It’s all a matter of choosing the right type of program for your particular situation. For more information, head to SuperMoney’s debt help overview page and guide to debt consolidation for recommendations.

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