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Is debt consolidation good?

Debt consolidation is favorable for those who're struggling to manage multiple debts and cannot afford to make several payments each month. Debt consolidation program gives them a way out by which they can replace multiple bills with one low monthly payment and pay off debt with ease. When you consolidate debt, you pay less each month and save thousands of dollars. Check out the 8 benefits of debt consolidation.

5 Ways to pay off debt

There are 5 ways to get rid of debt and lead a stress-free life. But what's important is that you choose the one that works for you.
  1. Interest rate arbitration: This is where you choose an independent third party to negotiate low interest rates with your creditors. So, you can consolidate multiple bills with one low monthly payment. This is also known as loan consolidation. The benefits are:
    • Pay less each month
    • One monthly payment instead of many
    • Credit score improves
  2. Debt management: This is where you work with a debt solutions company to help you pay off your debts and create a budget. The benefits are:
    • Interest is reduced
    • Late fees may be waived off
    • Manage multiple bills with ease
  3. Debt settlement: This is where you have a settlement company/law firm working with your creditors to lower your payoff amount by 40-60%. With settlement, you have 2 major benefits:
    • Creditors reduce interest
    • They cut your principal balance
  4. Chapter 13 bankruptcy: Chapter 13 is a court monitored debt repayment plan. The benefits are:
    • Creditors reduce interest on your debt
    • They trim the principal debt balance
    • You don't use your assets to pay off debt
  5. Chapter 7 bankruptcy: This is where you hand over your assets to a court-appointed trustee who sells them off and uses the sale proceeds to pay off your debts. With Chapter 7 bankruptcy, you get the following benefits:
    • Interest on your debt is lowered
    • Principal balance is reduced
    However, your credit score takes a hit and it'll take quite a few years till you actually rebuild your score.

Debt consolidation example

Here's an example of how consolidation works:
Suppose you have accumulated debt on 2 credit cards, as well as medical bills and a personal loan. The details of these accounts are:

Outstanding balance on credit card X (15%) - $15000
Outstanding balance on credit card Y (20%) - $12000
Amount you owe on medical bills (13%) - $13000

So, the average interest rate = (15% + 20% + 13%)/3 = 16%

After you enroll in a consolidation program, the interest rates on your debts are negotiated down to:
Credit card X - 10%
Credit card Y - 16%
Medical bill - 10%
So, the average interest rate = (10% + 16% + 10%)/3 = 12%

Now if your total debt amount is $40000, you'll save = (16% - 12%) * 40000 = $1600 per year

How our community helps you

With over 229,000 members, our community gives you the strength and support to resolve financial problems on your own. Here are the benefits of being our community member.
  • Forums: Discuss your problems and get free debt advice from our community members. The members share their real life experiences on how to deal with creditors and collection agencies. You learn from their experiences and make your financial life easier.
  • Debt calculators: These are financial tools that help you calculate your debt and figure out how much you save by consolidation or settlement. There are tools to determine how long you'll take to pay off your credit cards and how much you need to pay monthly. Then there are calculators which help analyze your debt and income and calculate the APR on your loan.
  • Ranking Chart: While debtors can find the best debt consolidation/settlement company here, companies have the advantage of getting ranked and promoting their services. The Ranking Chart offers a state-wise listing of debt relief companies. It's where you compare company profile, services and accreditation so you can find out the best company to deal with.
  • Earn dollars: Our community rewards you for your valuable contribution in the forums and other community activities. There are 7 simple ways to earn dollars in our community.
  • Get recognition: Our community appreciates your valuable contribution and gives you the opportunity to earn recognition as "Hall of Fame" member, "Debt Samaritan" and "Moderator".

Top rated articles to help you lead a debt-free life

  • 7 Steps to become debt-free: Getting rid of debt isn't impossible but you need to plan your way out of it. Check out 7 steps on how to pay off debt and achieve financial freedom.
  • Debt consolidation loans: Banks and financial institutions often provide you with unsecured personal loans to consolidate debts. However, bad credit debt consolidation loans are hardly available because banks and lenders may consider you as a high risk borrower if they find too many negative items on your credit report.
  • Credit card consolidation: With this option, you consolidate debt on credit cards and get rid of bills with one monthly payment instead of many. If you're in military service, you may qualify for military debt consolidation program that'll help you pay off credit card debts with a small monthly repayment.
  • 6 Types of debt solution: Compare debt consolidation, settlement and other ways to resolve your credit problems. Find out what impact they can have on your credit score and choose the one that suits you the best.
  • Christian debt consolidation: It works similar to any other consolidation program. The only reason why it is called Christian consolidation is because it is based on the Christian principles which believe in serving one master, that is, God. Since man cannot serve 2 masters at the same time, hence he can get help from Christian consolidation services and free himself from the bondage of debt. That's how he'll find out time to serve God and live the Christian way of life.
  • Bill consolidation: Under this program, interest rates on credit card bills, medical bills or utility bills are lowered and any late fees or over-limit charges may be eliminated to help you pay off debt conveniently. So, you pay less toward your bills and save money each month. You can use the money to pay off other debts or contribute toward your retirement/future savings.
  • Credit counseling: This is an option in which you seek debt advice from a credit counseling agency that is a member of the NFCC (National Foundation for Credit Counseling). The credit counselors help you with budgeting and money management advice and offer tips on how to manage multiple bills conveniently.
  • Debt consolidation non profit: This is similar to any consolidation program but it is offered by a company that has obtained the non-profit status from the IRS. Debt consolidation non profit programs are not available for free. Either you'll need to pay lower fees or make voluntary contributions to take advantage of these programs.

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