Does debt consolidation work?
Debt consolidation can be very effective in certain situations. It’s essential to explore all your options for getting out of debt before committing to consolidation.
Also, be aware that there is more than one way to consolidate. You can use a debt consolidation loan or a debt consolidation program. Both offer many of the same benefits, but the loan requires new financing, while the program does not.
Generally, a debt consolidation loan works best for someone with good credit and a relatively low amount of debt compared to their income. This allows you to qualify for the loan at the lowest interest rate possible.
With a debt consolidation program, you do not have those limitations. You can enjoy low rates and reduce your total payments, even if bad credit or too much debt would prevent you from consolidating with a loan.
What types of debt can I consolidate?
Most debt consolidation loans are used for credit card debt. However, there are other types of debt you can consolidate:
- Personal loans
- Debt collections
- Medical debt
- Federal student loans
- Private student loans
- IRS tax debt from multiple years of back taxes on income tax returns
- Auto loans on different vehicles
Will consolidating my debt hurt my credit score?
The short answer: No, and it may even help your credit score.
The long answer: In the short term, your credit score may dip because lenders may conduct hard pulls of your credit. This adds new inquiries to your credit file, which can cause credit scores to be temporarily lower.
It won’t take long for your score to rebound after this initial setback. Then, if you make your monthly payments toward your consolidation loan on time, your score may start to improve.
That’s what you can expect with a debt consolidation loan. With a debt consolidation program, you will still avoid negative credit report notations and will build a positive payment history. However, creditors will close your credit cards after you pay them off, which can drop your credit age.
This can temporarily decrease your score in certain cases, but only in the short term and your credit should rebound quickly.
How long does consolidating debt take?
Actually getting a consolidation loan and using it to pay off your credit cards can take a matter of a few weeks. Paying off the consolidation loan will take between 12-60 months, depending on the term of your loan.
If you enroll in a debt consolidation program, it will take a maximum of 60 months. On average, these programs are completed in 36-60 months, but it can be less depending on your budget and situation.
How do I qualify for debt consolidation?
When you apply for a consolidation loan, lenders will conduct a hard pull of your credit to review your credit scores and account history. The higher your credit score, the more likely you are to qualify. A higher credit score may also mean a lower interest rate if you do qualify for the loan.
Once the lender reviews your credit, they will let you know if you are approved and what the interest rate and terms of the loan would be.
For a debt consolidation program, you can generally qualify as long as you have enough income to make a monthly payment on your debt.
What if I miss a payment?
As with any loan, missing a payment on a consolidation loan can have some negative effects. Depending on your lender and your loan agreement, there may be late payment fees assessed. If you miss the payment by more than 30 days, it may also affect your credit score since the missed payment could be noted in your credit history.
With a consolidation program, a missed payment can result in the cancellation of your program. Creditors would credit any payments made to that point but could restore your original interest rate and any penalties that were previously applied to your account.
To avoid either of these situations, maintain communication with the organization administering your consolidation solution. Contact the lender or service provider, ideally before you miss the payment, to see if you can move your due date, get a one-time delay for your payment, or make other arrangements.
What options do I have besides a debt consolidation loan?
If traditional monthly payments to your creditors are not working to get you out of debt, you have a range of options that can help. This includes balance transfers, borrowing against home equity if you own your home, credit counseling, and debt negotiation.
You also have the option to file for bankruptcy, although this should only be used as a last resort once you’ve explored all your options.
It’s important to talk to a qualified professional to discuss these options in detail before you make a decision. If you apply for a debt consolidation loan through Epic Loans, we provide a free, confidential evaluation with a Debt Consolidation Specialist so you can review your options together..
Is a debt consolidation loan the same thing as a debt management program (DMP)?
Both of these options will consolidate your debt, but they work very differently.
A debt consolidation loan is a loan you can use to pay off your various credit cards. This rolls all of your debts into one—meaning one monthly payment and one interest rate.
A debt management program (DMP) is usually run through a nonprofit service. The nonprofit organization could help you consolidate your debt payments and apply lower interest rates by working with your creditors. You get the same benefits, without receiving new financing as you do with the loan.
Which of these options is best for you depends on your specific financial situation. Talk to a Debt Consolidation Specialist for free for personalized insight on how you should handle your debts.
How much will debt consolidation cost?
This depends on which debt consolidation solution you choose and which provider. A debt consolidation loan will generally have a loan origination fee that ranges from 1-5% of the amount you borrow. With a consolidation program, there will be a one-time setup/start-up fee, as well as monthly administration fees that are set by the state where you reside.
In both cases, the fees are included with your payments once you consolidate. And you will know about the fees before you consolidate. Just make sure to read your contract agreement carefully.
Is debt consolidation the best option for me?
This depends on your specific financial situation. Every financial situation is different, so the same solution won’t work equally for everyone. That’s why it’s important to get information on all your options for becoming debt-free before you commit to a solution.
With Epic Loans, you can do that! We provide a free consultation with a Debt Consolidation Specialist that can help you see if consolidation is the right fit for you and compare it to your other options.