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Is Debt Consolidation a Good Fit for You? Author's Picture

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FirstCapital Bank of Texas

Is Debt Consolidation a Good Fit for You?

Are you one of the 80 percent of Americans living with debt? There are a variety of  ways in which people find themselves in debt: While the most common form is mortgage debt, which accounts for 44 percent of debt for almost every generation, millennial debt is fairly evenly divided between student loans (41 percent), car loans (41 percent), and credit card debt (39 percent). Regardless of your reason, you may be considering your options to get on more secure financial footing. Debt consolidation is a term thrown around often, but how much do you really know about it? Here, we answer your biggest questions to help you decide if this is the right choice for your specific needs.

What is debt consolidation?

Debt consolidation (you guessed it) consolidates your debt into one personal loan with a single monthly payment. This not only streamlines your payments so you have one bill due on one date, which can be especially helpful for those who struggle with managing multiple payments on time, the interest rate on the loan is usually lower so you can save money too. Consider it a restructuring of your debt in a more convenient—and money-saving—way.

Is it the same as debt management?

No. While debt consolidation loans are payments toward the lump sum of your debt, debt management plans distribute money on your behalf to your existing creditors. A counselor will calculate monthly payments based on your budget and determine how long it will take you to pay off your debt. They then advise your creditors of the terms they’re offering, which many will accept, as smaller payments are better than missed payments. However, creditors are not obligated to accept these terms and participate in this program, so this option is not always foolproof.

Will it save me a lot of money?

It depends on your perspective. First and foremost, debt consolidation loans are not designed to forgive or decrease your debt; they’re designed to make payments easier and more convenient. However, most personal loans enable you to consolidate at a lower interest rate than what you’d pay on a credit card or other high-interest debt. How low your rate will be depends on your creditworthiness. You may also get a lower introductory rate, just be aware that they typically increase after 12 or 18 months.

Will it help my credit score?

Yes, as long as you make your payments regularly and on time. Payment history accounts for 35 percent of your credit score so not having to remember to make multiple payments every month should be a plus. Also, if your consolidation loan is replacing credit card debt, that means it’s replacing “revolving” debt, which can be hard on your score if not handled properly. This is important to keep in mind if you’re considering a debt management program. Before agreeing to payoff terms, most creditors will require you to close the account in question. Closing credit card accounts can have a negative effect on your credit score because it decreases your overall available credit, which can hurt that all-important credit utilization percentage and make it more difficult to get new credit in the future. You’re typically under no such obligation to close accounts you pay off with a debt consolidation loan.

Will I have to pay a fee?

While many debt consolidation loans are advertised as free, some do include “origination fees.” These are typically a percentage of the overall loan and basically cover the cost of processing the loan. Loans that waive origination fees are usually up front about it as that’s a big selling point for some. Like any other loan, you will be responsible for paying applicable interest. If avoiding fees is very important to you, be wary of credit counseling services debt management programs, as these services typically carry both origination and monthly fees.

So, now that you have a better understanding of the specifics of debt consolidation loans and you’ve decided it’s the right move for you, it’s time to take the next step: Apply for an unsecured personal loan from a trusted lender with a history of solid rates and superior service, like FCB Texas.