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Debt consolidation can help solve problems with credit cards, student loans, and even back taxes. Can it work for you?
If you’re making debt payments every month, but it feels like you’re getting nowhere fast, it may be time to consolidate your debt. You may have heard the term “consolidation” but unless you’ve used one of these solutions before, you may not understand exactly how it works. This guide is designed to teach you everything you need to know about debt consolidation. If you still have questions, feel free to head over to our Ask the Expert section to ask our panel of experts.
The goal is to pay back everything you owe more efficiently.Debt consolidation refers to any debt relief option that rolls debts of the same type into a single monthly payment. The goal of consolidation is to pay back everything you owe more efficiently. This helps minimize damage to your credit score, which often makes this a more desirable solution versus debt settlement.
So, how do you do it right? Debt.com will show you how to consolidate your debt by yourself, or how to consult a professional who can walk you through it. Even if you go your own way, it doesn’t hurt to consult a certified credit counselor for free debt analysis.
You can also learn about other options like a debt management program or debt settlement. But first, find out if debt consolidation is right for you.
Consolidating debt focuses your money on paying off principal.In most cases, consolidating debt also allows you to reduce or eliminate interest charges. As a result, you can get out of debt faster because you focus your money on paying principal, or the actual debt you owe.
In general, you can only consolidate similar types of debt. While you can consolidate credit cards and student loans, you usually have to keep them separate. If you owe multiple types of debt, you may need more than one debt consolidation plan.
|Type of Consolidation||Debts that can be included|
|Unsecured debt consolidation (commonly called “credit card debt consolidation” or “credit consolidation”|
|Federal student loan debt consolidation||Most federal student loans, not including PLUS loans to parents|
|Private student loan debt consolidation|
|Installment agreement (IA)||IRS tax debt from multiple years of back taxes on income tax returns|
|Auto loan consolidation||Auto loans on different vehicles|
There are two different ways to consolidate debt. The best way to consolidate debt depends on your unique financial situation.
The most common form of consolidation that uses new financing is a debt consolidation loan. However, there are also other versions, such as a Home Equity Line of Credit (HELOC) or balance transfer credit card. Here are the steps involved.
This type of debt consolidation does not replace old debt with new financing. Instead, you still owe the original creditor. It’s a structured debt repayment plan.
Again, the specifics tend to vary based on what type of debt you owe. Consolidation programs are most commonly seen with tax debt and credit cards.
There are four ways to consolidate credit card debt, and only three of them are generally advisable.
There are only two ways to consolidate student loan debt:
There are two basic ways to consolidate tax debt:
It is possible to consolidate payday loans, but it’s usually limited to using a debt consolidation program.
Military Service Members and Veterans have a special option for debt consolidation called a Military Debt Consolidation Loan (MDCL). They also usually qualify for discounted fees when they enroll in a debt consolidation program.
If you purchased your home using a VA home loan, you are eligible to get an MDCL. It’s a loan that borrows against the equity in your home. The MDCL is a cash-out refinance mortgage that pays off your original loan and then gives you the cash difference in equity. So, if your home is worth $120,000 and you owe $80,000 on your original VA home loan, the MDCL gives you a loan for $120,000. You get the $40,000 difference back and can use the funds to pay off debt.
The issue here is still that you borrow against your home’s equity, so you take on an increased risk of foreclosure with an MDCL. In many cases, you are better off using a debt consolidation program, particularly given that military Service Members and Veterans qualify discounted fees on debt management programs.
It’s also possible to consolidate unpaid medical bills using a debt consolidation loan or debt consolidation program. If you had out-of-pocket medical expenses that were not paid by insurance, these bills can quickly turn into collections. Medical debt collections are the number one cause of bankruptcy in the U.S.Back to top
In many cases, with both debt consolidation loans and consolidation programs, your total monthly payments are reduced. With reduced or eliminated interest charges, you can get out of debt even though you often pay significantly less each month.
Article last modified on August 7, 2019. Published by Debt.com, LLC