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Let’s talk about debt consolidation.

My first thought when I hear that phrase is a smarmy infomercial on late night TV and guy in a bad toupee trying to sell me something that looks sketchy as all get out.

In reality, it can be an amazing tool to help you handle your debt.

How does debt consolidation work?

Essentially, a debt consolidation company takes the total amount of money you owe and then pays off your balances and become the holder on the loan. Sometimes they just lend you the money to pay off the balances yourself, but essentially same difference.

Now, instead of paying the other company, or more likely – companies, you pay only the debt consolidation company, and usually at a notably lower interest rate than the original debt was.

Think of it this way – it’s like if you have a really rich friend who can just drop $50,000 to solve your problem, but you now have to pay them 6% interest, instead of you paying 2% interest on a $10,000 student loan, 7% interest on $30,000 in medical bills and $22.5% interest on $10,000 of credit card debt.

For them, this is easy because they have the large cash reserve. And they’re still making some easy money off of you. For you, this is easy because now your interest rate is, overall, lower and you only have to deal with one bill a month instead of three.

You could also decided to only combine the $40,000 that had a higher interest rate to really maximize your savings.

Despite a history of sketchy late night commercials and questionable men in toupees, debt consolidation is actually a really useful tool in paying down your debts.

So what are you looking for in a good debt consolidation company?

Clear terms.

Some companies only consolidate certain kinds of loans. You also want to make sure that you are getting a good deal with an overall lower interest rate.

Honestly, if a lot of your debt is on credit cards, debt consolidation is really the way to go. You are almost always going to find better rates than the astronomical interest charges that credit card companies will hit you with.

Some student loans are actually at a very manageable interest rate, and in that case, consolidating them might not be in your best interest.

Length of Loan

Make sure you know how long you have to pay back the loan. Companies like Upstart limit their repayment to 3 or 5 year terms. This can be great because there is now a clear end in sight to your debt, but if your debt is really large and you know you can’t repay it within that time frame, you may need to find a different company.

Buckling down for a few years might seem doable to you, but others might want longer terms and more freedom, so make sure you consider the length of the new consolidated loan too.

How Your Loan in Calculated

Most lenders use your credit score as the be all, end all to judge what your interest rate should be.

If you’re a recent college grad or you’ve had a rough history with debt, your credit score could be pretty low – resulting in higher interest rates.

Upstart is one of the few companies that does a more comprehensive profile on you when setting your interest rates. While your credit score is still involved, Upstart also takes into account job history, level of education, and field of study.

The folks who founded Upstart realized that a lot of Americans who have trouble qualifying for credit based on traditional models have never missed a payment or defaulted on anything. Their updated analysis system allows more people to qualify for loans who would have struggled in the past.

Debt.com is a great resource for more information on consolidation, and additional ways to consolidate. They also have some really awesome resource for credit counseling, which is something you may want to consider too. No, this isn’t a place for you to talk about how buying shoes and fancy watches makes you feel.

Debt Counselors actually act as a go between for you and your credit company. They can negotiate lower rates, set up new payment plans, and hopefully get you a lower interest rate. You can find both profit and non-profit debt counselors, the latter often offer free consultations.

While debt consolidation might not be for everyone, if your debt is credit card heavy or you have so many different lines of credit that you have trouble keeping track of your payments, debt relief services can really help you on your repayment journey.

Have you consolidated your debts before? How much did it help you save?

 

Also, check out this review of Qoins – a cool and easy to use tool to help pay down your debt too.