Bill or debt consolidation is a debt relief method that involves combining all unsecured debts, such as credit cards, medical bills and insurance, and tuition bills, into one, fixed monthly payment. Taking out an unsecured or secured loan and working with a debt counselor are common ways to consolidate debts.
If you are deep in debt and having trouble paying your bills you may want to lower your monthly payment, or decrease the amount of interest you are paying, by consolidating your debts. Read on to learn more about your options and whether consolidating debts is right for you.
How Debt Consolidation Works
There are a few options to consolidate your debt: a bank loan, a home equity loan, or a credit counseling service. If you own a home and have equity in it, you can consolidate your debt through a home equity line of credit. Alternatively, you may also get an unsecured consolidation loan from your bank to pay off your creditors.
Using a secured, home equity loan you can consolidate all of your unsecured debt into one single payment. Unlike other solutions, your credit score is not permanently affected because the lender gets the assurance of your loan repayment. As the loan runs for a fixed period, you can repay it in a shorter period with principal reduction in every repayment.
A credit counseling agency can help you deal with your creditors via their debt management program. They will help pay your bills — you send them one monthly payment, and they distribute the payments to your creditors. They can also counsel you on credit management, which debt programs to go for, when to take a loan and what repayment structure to follow.
If you’re a good negotiator, you can consolidate your debts by applying a consolidation loan that offers a lower interest rate than your debt’s rate. With the loan in hand you can then call all of your creditors to remove some charges and fees, or even interests, if you are going to pay off their bill in one lump sum.
When Does Bill Consolidation Work for You?
Bill consolidation is not always the right choice for every person. If you find it difficult to pay off your monthly bills, consolidation offers a way to get your finances under control. By consolidating your debts you can easily make on-time payments and, as a result, reduce late fees and extra charges.
However, if a substantial part of your income goes toward paying interest and you need to incur more debts to meet routine expenses any other loan will further increase your debts and inflate your interest payments. In this situation bill consolidation might actually put you into a worse position.
A consolidation loan or a debt management plan can help you pay off your debts. However, if you find it difficult to manage your money then you will need a credit counselor that can teach you how to manage your finances, otherwise debt consolidation will only treat the symptoms of your financial problem.