Debt Consolidation: The Ultimate Guide for Beginners

Wallet full of credit card debt

Everybody has debt. However not everyone is great at paying all their bills on time. Even worse, some people get in over their head financially and struggle to stay afloat. Without an emergency fund in the bank, some people are only a paycheck or two away from facing foreclosure and even bankruptcy. But being heavily burdened by debt isn’t something people just have to accept. Likewise, ignoring debt will also not make it go away, and in many ways only makes it worse.

By reading Debt Consolidation: Ultimate Guide for Beginners, you can make yourself familiar with programs that are available to debtors with unique situations. This guide goes over why you should consolidate, how to consolidate, the definition of a debt calculator, and even provides resources with reputable banks and online lenders. To start off the guide, we’ll go over why a person should consider consolidating their debts. Make sure to read the guide in its entirety to truly understand how a person can handle their debt is a responsible way.

Why Consolidate?

It’s likely you’ve seen the commercials or even received advertisements in the mail about debt consolidation. You may think you know what it is, but have you ever considered why you should consolidate your debt? You might even have the opinion that no one can help you in your situation or that only people in really bad situation turn to a debt consolidation loan as a means to pay off your debts. But, this simply isn’t true many different people choose this type of financing as a means to improve their financial situations.

Debt consolidation is a long-term, financial strategy. It helps to eliminate debt by combining on bills into one loan. The personal loan is used to pay off debts and help you get out of debt faster. In general, it takes two to five years to complete a debt consolidation program.

When done correctly and finished completely, a consolidator can expect to enjoy:

  • Lower interest rates
  • Lower monthly payments
  • Protected credit score
  • A way to get out of debt faster

You’re probably wondering what the catch is, and there is a catch. A debt consolidation loan only works in the way it’s designed to work. For instance, you aren’t going to get out of debt faster or easier, if you don’t stick to the repayment plan, if you choose a debt consolidation company that doesn’t have your best interest in mind, or you continue to rack up credit card bills and other debt while repaying your consolidated loan.

The people who are most successful with a debt consolidation loan are the ones that are committed to making it work. If you are on the fence about whether this type of loan is correct for your financial situation, it’s important to talk to a credit counselor. Credit counselors can evaluate your situation, make suggestions that are right for you, and point you in the direction of a company that will help you be successful with debt consolidation.

The most important thing to remember about a debt consolidation loan is that it won’t work if it isn’t done correctly. For instance, if the lender doesn’t handle the situation properly or if the debtor doesn’t uphold their end of the deal, a borrower’s financial situation could get worse. In fact, it could get so bad that a debtor has no choice, but to file for bankruptcy.

While most people seek a debt consolidation loan voluntarily, there are also some people who are forced into this type of situation. Whether a person can be encouraged or forced to work with a credit counselor and develop a repayment plan including a debt consolidation loan is up to bankruptcy laws in a particular state. In many states, a person trying to file for Chapter 13 bankruptcy may be forced to get a debt consolidation loan to pay off creditors.

If a person is forced to get a debt consolidation loan, it is imperative that they complete the process. If debtors don’t fulfill the requirements of a Chapter 13 required debt consolidation loan, they could put secured debts or other assets in fear of being revoked by a court of law.

How to Consolidate?

Have you ever considered a debt consolidation loan, but brushed off the idea because you didn’t know how to start the process or who you could trust to help you make good financial decisions? Many people do, but with the proper investigation and preparation, it is easy to determine how to consolidate debt.

The first step is gathering all of your bills with unsecured debt. Unsecured debt is a loan or credit card that isn’t based on tangible property. For instance, medical bills are unsecured debt. Gather all of these bills and add them up. Other examples of unsecured debt include:

  • Cell phones
  • Utilities
  • Credit cards
  • Medical bills
  • Personal loans
  • Payday loans

Next, examine how long you have left to pay on each of these debts and what interest rates are being charged. Depending on the lender you choose to handle a debt consolidation loan, you may have certain restrictions about what types of loans can be included in the new loan. If you have secured debt that you are having trouble with, you will need to talk to a debt consolidation counselor to see what your options are for that particular debt.

After you have totals with interest included, examine your budget. Be realistic about how much you can afford to pay towards your debt every month. Overestimating how much money you can afford to pay towards the debt consolidation loan will only hurt you in the long run. To avoid this, don’t forget to leave a cushion for unexpected expenses and plenty of money to cover your monthly necessities such as rent, food, transportation, etc.

You also have to realize that you will not be able to use credit to purchase items or pay bills until your new debt consolidation loan is paid off. If you do rack up new credit card charges, you will end up being in a worse financial situation very quickly. The only way to truly eliminate your debt is to combine all debts into one new loan and not create any new charges until the debt is completely paid off.

When you have the total amount you can realistically spend to pay down your outstanding debt, you’re ready to think about how you are going to consolidate these payments, and if need be find an alternative to consolidation.

Ideally, the best solution would be to get a single loan to pay off your outstanding unsecured debts. Inquiring with your bank or credit union is always a good start; however, it’s not for everyone. Unfortunately, if your credit is not in the good too excellent range, you probably won’t get a consolidation loan with a very competitive rate.

If you can’t get a good interest rate, you may not actually save money by consolidating your debts. In fact, if you don’t earn a competitive rate, you may be better off not consolidating your debts at all. Or in the very least examining all other options before accepting a loan with a less than great interest rate. While banks and credit unions are a great source for this type of financing, there are many other options available as well.

Online lending services are also a great source for receiving debt consolidation loans. Online lending services compete in a very competitive market and often offer great deals to entice customers to work with them. When you being searching for the right lender to finance your consolidation loan, you’ll need to understand the different types of consolidation loans and how each of these programs work. You’ll also need to do your own research about the types of loans you are considering and the reputation of any company you are thinking of obtaining funding from.

Types of Debt Consolidation Loans

Now that you know why you should get a debt consolidation loan rather than work with a debt management or debt settlement company, and you know how to start looking for a lender, it’s time to discuss the different types of debt consolidation loans; personal loans, home equity loans, zero balance transfers to an existing or new credit card, and student loan consolidation programs.

A home equity loan can be used to pay off outstanding debt if you have equity in your home. If you don’t own a home or have equity in your primary home, you can stop reading now and skip to the next sections. It’s also important to realize that most banks and online lenders will only offer a home equity loan on a person’s primary residence. If you already have a home equity loan on your home, you may be able to extend the equity offered to you. If you cannot extend the credit or have enough left in the loan, you will also have to choose a different consolidation loan solution.

Usually a home equity loan can be done with a trusted mortgage company. Wells Fargo and Chase Bank offer popular home equity loans that can be used to pay off debt. The most important thing to remember when you get a home equity loan to pay off debt is that you are now using your home to secure what was once unsecured debts. Doing this can offer a borrower huge benefits but also comes with some pretty serious consequences as well.

If you are already feeling overwhelmed by debt and struggling to keep your head above water getting a home equity loan may be dangerous because you are essentially putting your home in danger of being lost. In some ways, it also means you are simply taking your debt and moving it from many creditors to one creditor. What it doesn’t mean is that you got a handle on your debt problem or have come up with a solution on how to get yourself out of debt. Home equity loans also aren’t given to people who are upside down on their loan or if the borrower has a low credit score.

Another financial consolidation option is a personal loan. A personal loan can be used to pay off whatever you want including outstanding unsecured debts. It’s important to realize that you’ll only get a competitive rate on a personal loan, if you have good credit. If you don’t have a good credit rating, you may still qualify for a personal loan to pay off debts but at a higher interest rate. If you find yourself in this situation, you have to carefully measure if consolidating all of your bills into one, monthly payment will save you interest and lower your monthly obligations. If it doesn’t you should visit a credit counseling agency to see if a debt settlement program or debt management program may be a better option for your financial situation. It’s also worth noting that you will usually get the best deals on a personal loan from the bank that you do most of your banking through. For instance, if you’ve been going to your local credit union for the last 20 years, it’s probably a good idea to start there first.

Zero balance transfer credit cards are one of the best ways to pay off unsecured credit card debt, but only if the deal is perfect and it’s done correctly. A credit card balance transfer won’t include other types of debt such as medical bills, utilities, and cell phone bills unless already paid by one of the credit cards in question, but is still a great way to reduce credit card debt. To be truly effective a zero balance credit card transfer should have a promotional period where no interest will be charged on the transferred balances. It’s also vital that you can commit to paying the balance off before the promotional period ends. If you can’t, you will accumulate interest charges on any unpaid amount when it expires.

It’s worth noting that a credit card balance transfer is another option that is usually only offered to consolidators with stellar credit ratings. If you don’t have excellent credit, you likely won’t qualify for this type of balance transfer to pay off credit card debt. But you still have other options.

Student loans cannot be settled or written off as bad debt. When a student signs the Master Promissory Note, they are stating they understand this type of debt is only written off in cases of death or in some situations total disability.

There are student loan consolidation programs though. It’s best to get information about student loan consolidation from the US Department of Education. The reason you should start here is because there are many companies that advertise ways to help you eliminate your debt, but then turn out to be scammers. Predatory companies that offer to help with student loan consolidation don’t tell you that it’s actually a free service.

Not only is it a free service, but there are people who will help student loan debtors manage their debt and consolidate it when necessary for free. A student loan debtor should never have to pay someone to help them manage this type of debt.

Now that you understand you should never pay someone to help you with this debt, it’s important to point out that you should never default on this type of loan because of serious consequences. Instead, you should consider consolidation options that will help you lower monthly payments and reduce interest which will save you money in the long-term scheme of things.

If you are totally unable to pay anything towards your student loans because of a financial hardship, the US Department of Education offers forbearance and deferment programs for this reason.

Debt Consolidation Loans for Bad Credit

People who are struggling to pay off outstanding debt and have bad credit are often targeted by companies who offer to help debtors pay off their debt fast and for much less than they owe. If you find yourself in this situation, it’s important to consider one thing “if it sounds too good to be true, it probably is.”

Legitimate companies that offer these types of services usually only want customers with good credit, which still leaves people with bad debt struggling to find a solution to their problem. However people with outstanding debt and bad credit shouldn’t feel like they have no solutions, there are solutions, it’s just a bit harder to find the right solutions.

First anyone in this situation needs to know their credit score. It’s absolutely vital to know your credit score and make sure it’s accurate. If your credit report isn’t accurate, it’s important to make the corrections necessary to raise your credit score right away. This can be done by contacting the credit reporting agency and challenging the inaccurate information.

Once you know your credit score and you’ve made all the challenges to the report that you can it’s important to understand where your credit score lies in the bad to excellent ratings. Lenders usually consider a bad credit rating anywhere in the 350 to 600 range.

Even if you’ve done everything you can at the moment to improve your credit rating and you still find yourself with bad credit, you have debt consolidation options. First, you can consider if getting a co-signer or secured loan would help your situation. Each alternative comes with its own pros and cons, but might be right for your situation.

With a co-signer, you’ll have to find someone that trust you will make good on your outstanding debt. The co-signer will also have to have good credit. It’s important to realize if you default on a co-signed loan, the co-signer will have the negative information reported on their credit report and will be responsible for the unpaid debt.

With a secured loan, you will have to put up something that is worth at least the amount you are attempting to borrow to pay off debt as collateral. Usually, this can be a car or home. However, if you default on the loan, the lender will be able to take your car or home. A secured debt is also dangerous because it can come with stricter requirements of the loan such as no grace period and high interest rates, and usually is offered for a shorter amount of time than unsecured loans.

One debt consolidation company that works with co-signers during debt consolidation loans is PayOff, an online lender. This lender is available in 31 states and offers loans in the amounts of $5,000 to $35,000. Usually, PayOff loans are able to be paid off in two to five years, and require a co-signer with an excellent credit rating of at least 720.

Lenders that will accept applicants with bad credit include Avant. Avant offers loans in the amount of $1,000 to $5,000 and is offered in 47 states. With an Avant debt consolidation loan, you will usually pay off your debt in two to five years. The minimum credit score needed to apply is 580, and funds are usually payable the same day or in as little as seven days. This type of loan comes with an origination fee and charges a percentage of the loan as a fee. It can also come with a high interest rate. The interest rate one could expect to receive with an Avant debt consolidation loan will depend largely on the applicant’s credit score and amount of money borrowed.

Credit Card Debt Consolidation

Credit card debt

We’ve talked about credit card zero balance transfers already, but now it’s time to talk about credit card debt consolidation loans, which is something completely different and another option for people with good credit to manage unsecured debt.

To qualify for a low-interest credit card debt consolidation loan, an applicant will usually need a credit rating of at least 720. Companies that offer these competitive loans can be few and far between and are usually only an option for people who no longer want to use credit cards to purchase items.

Debt Consolidation Companies

What’s the best debt consolidation company? You can spend a great deal of time arguing with someone over who the best debt consolidation companies are, but every person’s experience can be different. Unless someone has the same exact situation as you, you can’t possibly have the same experiences. However, there are some things you should consider when choosing a debt consolidation company.

First, you need to pick a company that is reliable and operates under the Federal Trade Commission’s regulations. To be sure if a company is working within the FTC’s guidelines, you can visit the website online to verify.

Another sign of a good, ethical debt consolidation company is its accreditations. Two accreditations that consolidators should look for include:

  • International Organization of Professional Arbitrators (IAPDA)
  • American Fair Credit Council (AFCC)
  • United States Organization for Bankruptcy Action (USOBA)

In addition to those accreditations, debtors should also look up a company’s Better Business Bureau BBB rating. Companies can pay to become a member of the BBB. However, whether a company is a member of the BBB does not determine whether they have a BBB score. The scores range from A+ to F and can tell a person a great deal about a company’s ethics, policies, customer service, and reputation.

After you determine what the company’s score is make sure to check out the company’s reviews on BBB and whether there are any government actions against the company or not. Ideally, you want to choose a company that has a high rating, good customer reviews from consumers, and no government actions. If you cannot find a company on the BBB’s website, you should be weary of doing business with them. Two companies with reliable reputations and a history of good reviews from consumers include LightStream and So-Fi.

LightStream is an online lender that works with consolidators with at least a 680 credit score. Most debtors can pay off their debts in as little as two years or as most as seven years. LightStream offers loans starting at $5,000 and top out at $100,000. Borrowers can expect to receive funds from in one day or can take up to 30 days to receive. One feature that makes this consolidation company so popular is the fact that it charges no additional fees.

So-Fi is also an online lender specializing in debt consolidation loans. The online lender offers financing to consumers in 47 states and works with borrowers with at least a 700 credit rating. Loans from So-Fi are available in amounts ranging from $5,000 to $100,000. Usually debtors can expect to pay off their debts with a So-Fi loan in three, five, or seven years.

Debt Consolidation Calculator

A debt consolidation calculator is a tool borrowers can use to help them determine whether a debt consolidation loan is right for their financial situation. A quick Internet search will make it easy to find a calculator that makes it easy for you to simply fill in the amounts requested and see how your monthly payments would increase or decrease.

For instance, the debt consolidation calculator will ask you to fill in any loan amounts, all credit card balances, and also includes a place to include all your outstanding debts. The online tool allows you to see what your payment could be if you combine your debts with a debt consolidation loan.

When you are testing the waters with the calculator, you should try to adjust the terms of a loan, try different loan types, and raise or lower the interest rate until you find a debt consolidation plan that meets your needs. It’s also important to make sure you keep your current monthly budget needs in mind when seeing what type of loan is right for you.

To get an accurate estimate from a debt consolidation calculator, you need to have the following information available. Not all of the information in the list below will apply to you, but if a particular situation does apply, it’s vital you have it available and enter the information as accurately as possible.

  • Loan Balance
  • Current Loan Payment
  • Number of Remaining Payments
  • Interest Rate on Loan
  • Credit Card Balances
  • Interest on all Credit Cards
  • Ideal Interest Rate for New Debt Consolidation Loan
  • Time You Expect it to Take to Pay Off Your New Debt Consolidation Loan
  • Any Up-Front Costs Associated with a Debt Consolidation Loan
  • Income Tax Rate
  • Closing Costs Associated with New Debt Consolidation Loan

If you don’t have any of the information listed above, you can use estimates. However, if you later find out that your estimates are not accurate, you’ll need to re-enter all information to get an accurate picture of what your new financial situation would look like. Popular debt consolidation calculators can be found at the following sources:

Bankrate: http://www.bankrate.com/calculators/home-equity/debt-consolidation-calculator-tool.aspx

Lending Tree: https://www.lendingtree.com/debt-consolidation-calculator

Discover Credit Card: https://www.discover.com/home-equity-loans/debt-consolidation-calculator/

Wells Fargo Bank: https://www.wellsfargo.com/personal-credit/debt-consolidation-calculator/

Chase Bank: https://www.chase.com/home-equity/debt-consolidation-calculator

Debtors should feel free to try a few different debt calculators to see if any information changes. The use of this free, online tool can also help a borrower determine if a debt consolidation loan is the right solution to their problem.

Best Debt Consolidation Programs

Many companies will claim to be the best in the business, but their reputation and client reviews speak for themselves. Overall, the following companies are regularly recognized as being the best in the debt consolidation industry.

  • National Debt Relief (our top recommendation)
  • Freedom Debt Relief
  • New Era Debt Solutions
  • Accredited Debt Relief
  • Pacific Debt Relief
  • Debtmerica
  • Curadebt
  • Premier Debt Help
  • Superior Debt Relief Services
  • Oak View Law Group

The list above was created with feedback from online reviews, BBB reviews and ratings, and cumulative opinions from previous consumers. There may be many other companies that perform the same or better as the companies listed above. Through the proper research and patience, a consumer can find a reputable company that will provide them with the services and products that will help them achieve financial freedom.

Now that you’ve reviewed the Debt Consolidation: Ultimate Guide for Beginners, you are ready to make good choices about your financial future – no matter what has or hasn’t happened in the past. It is possible to work on paying down your debt on your own, but many people struggle with patience and persistence it takes to pay off big debts. A credit counseling agency is also a good resource to help people struggling with how they are going to pay down their debt create a workable plan. Get your life back and stop living paycheck to paycheck by informing yourself about how to make your situation better and take steps to do it.