Debt Consolidation

Struggling to manage multiple repayment plans? You may want to consider consolidating debt. Debt consolidation options can help simplify your finances and bring your month-to-month spending under control.

There are many different debt consolidation programs that can help you manage your debt, but each one comes with certain risks. So, before you decide on a specific method, here’s everything you need to consider about debt consolidation.

Debt consolidation basics

Debt consolidation allows you to bring multiple debts together into one, single payment. This helps you to keep track of your debts and pay them in a way that is tailored to you.

The primary benefits of debt consolidation include:

  • Fewer monthly payments to manage
  • Lower total interest charges
  • Smaller total monthly payment
  • Reduced total cost of repayment

In other words, debt consolidation can simplify your repayment process and save you money. Each person’s debt situation is unique, so it is important to evaluate if consolidating your debt is the best choice for you.

Read more: Is Debt Consolidation Going to Help You?

Debt consolidation options

There are multiple ways to consolidate your debts. Here are what might be considered the six most common methods:

Unsecured consolidation loan

You can take out an unsecured loan for debt consolidation from your financial institution of choice, and use the money to repay your outstanding debts. Consolidating your debt in this way allows you to focus on repaying a single unsecured loan instead of your old debts. One disadvantage of debt consolidation with an unsecured loan, is that you may need a qualifying credit score to obtain the loan. You should also make sure the loan terms are an improvement on the terms of your other debt.

Read more: Pros and Cons of Consolidating Debt with an Unsecured Loan

Home equity loan

If you have equity in your home, you can take out a loan against that equity and use the funds to repay your debts. By consolidating your debt through a home equity loan, you may secure a lower interest rate and be able to pay off your debts sooner. However, one disadvantage of home equity debt consolidation is the risk of foreclosure.

Read more: Pros and Cons of Consolidating Debt with a Home Equity Loan

Mortgage refinance

By taking out an entirely new mortgage on your home, you can repay your old mortgage and other unsecured debts, leaving you with only the new mortgage. This debt consolidation option may help to condense your debt but could add more time to your repayment plan.

Read more: Pros and Cons of Consolidating Debt with a Mortgage Refinance 

Balance transfer

If you qualify for a balance transfer, you can open a new credit card and move your other unsecured debts to this card. While a balance transfer can be helpful to some, the disadvantages of this debt consolidation method include transfer fees, short term low rates and the risk of more debt.

Read more: Pros and Cons of Consolidating Debt with a Balance Transfer

Debt settlement program

In a debt settlement program, you make payments to the program rather than to your creditors. This form of debt consolidation utilizes a third party that handles all interactions with your creditors. Once the settlement agency has gathered enough funds, they will negotiate with your creditors for reduced payoffs.

Read more: Pros and Cons of Consolidating Debt with a Debt Settlement Program

Debt management plan

A debt management plan consolidates your debt regardless of your credit score. You work with a nonprofit credit counseling agency (like MMI) to make one payment a month which will pay all your creditors on your behalf. Often, creditors will offer reduced interest rates and other rewards for repaying through a debt management plan.

Read more: Pros and Cons of Consolidating Debt with a Debt Management Plan

All debt consolidation options will impact your credit (for better or for worse). Be sure to consider your credit and how it applies to your unique situation. While these debt consolidation options have the same underlying idea, each method is considerably different from the others. It is important to make sure you understand each option before choosing a debt consolidation program.

Disadvantages of debt consolidation

There are many potential disadvantages of debt consolidation. No matter which method you choose, you should keep these key drawbacks in mind:

  • Some methods require good-to-excellent credit
  • When you add unsecured debt to your mortgage, you risk falling behind on your mortgage payments.
  • Consolidating your debt creates a single large payment instead of several small ones. One missed payment can damage your credit significantly.
  • Consolidation can help you repay your debt, but it may cause you to create more debt.

Before you commit to debt consolidation, make sure you understand the risks and how the features of your chosen program will mesh with your own financial habits.

Read more: The Dangers and Drawbacks of Debt Consolidation

Learn more about credit and debt consolidation:

Still have questions about debt consolidation? Check out the links below or connect with one of MMI’s trained credit counselors to guide you through the process.

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