The Benefits of Debt Consolidation

Debt consolidation can eliminate stress and make your financial problems a bit easier. Between mortgages, car loans, credit cards, and personal loans, most households are making multiple payments to multiple financial institutions. The interest rates are likely vastly different from lender to lender, as are the repayment terms. All this can add to financial stress, worry and hardship. This is why you may want to consider the benefits of debt consolidation.

If you own a home, the interest rate on your home is probably the best you have. Credit cards are probably the highest, followed by car loans and personal loans. Of course, each case is different, but the common denominator for most households will be that the mortgage on your house is the most affordable debt you have (in terms of interest rates). The repayments on your loans vary greatly as well. You’ll have the most time to pay off your home’s mortgage. Auto loans generally last three to seven years, and credit card payments can go on forever, if you want them to.

All of this disorganization begs for debt consolidation. If you own a home and have equity, you can consolidate your debt under your mortgage. If you don't own a home or have equity, there are a variety of other ways to address the problem. The best of them involves securing the debt against some kind of collateral. You’ll get the best interest rate this way. If you don’t have any collateral, you can still consolidate your debt under and unsecured loan, but you’ll pay higher interest rates versus a secured loan.

Extend Payments

Extending payments can be both good and bad. The idea behind debt consolidation is to organize your debts into one, manageable and more affordable loan, and then pay that loan off as quickly as possible. Stretching payments will lower your monthly costs, but you’ll also be paying on debts for a longer period of time. Extended payments can be a benefit of debt consolidation, but only if you use the extra money to pay your debt down quicker.

Lower Monthly Payment

Since you’re extending payments, you’ll have lower monthly payments. For example, if you’re paying $3,000 on a variety of loans, debt consolidation could lower your payments to perhaps $1,800 a month. This gives you more breathing room every month, but that extra $1,200 should go to pay off the principle on your debt consolidation loan. If you don’t use the money wisely, you’ll simply find yourself owing for a much longer period of time.

Re-Aging of Accounts

If you have a debt that's past due, or even delinquent, creditors normally want a payment that will bring the account up to date. Re-aging the account means the account becomes current without making payment on the past due amounts.

Improved Credit Score

Debt consolidation can be a major step in rebuilding your credit. Late payments, defaults and charged-off accounts won't be a factor. As you pay off your consolidated debt, your credit score will improve.  

Elimination of Late Fees

If you're defaulting on an account, have late charges, debt consolidation can save you money on late fees and increased interest rates.

Eliminate Collection Calls

Consolidating your debt will end the calls you might get from creditors looking for payment. Of course, you'll need to make payments on your consolidation loan.

Debt Counseling

Sitting down with a financial planner who specializes in debt consolidation, or with your personal banker, will help you understand how to avoid the problem of too much debt in the future.