Debt consolidation can be a good option for consumers who feel overwhelmed by debt. Of course, before you decide what debt repayment route to go, it’s good to ask questions first. You should always do your research and weigh the pros and cons of each option before committing to any debt relief plan. We will be discussing some common debt consolidation questions and answers!
Frequently Asked Debt Consolidation Questions
What is debt consolidation?
Debt consolidation involves combining multiple existing debts into one new loan. If the rate on your new loan is lower than the rate on your old loans, you can save money on interest. For example, if you combine all your credit card debt into a new loan through debt consolidation, you could get a much better interest rate. With debt consolidation, you will only have one payment rather than multiple payments every month. This can make it easier to keep track of and pay your bills.
What are the requirements to get a debt consolidation loan?
Like any other loan, a good credit score is helpful when it comes to applying for a debt consolidation loan. The better your credit score, the better your chances are of getting a good interest rate. The four major qualifications to get a debt consolidation loan are:
- Proof of income – this is one of the most important debt consolidation qualifications. Lenders will want to know that you have the financial means to meet the terms of loan.
- Credit history – lenders will check your payment history and credit report.
- Financial stability – lenders want to know that you’re a good financial risk.
- Equity – collateral such as home equity is one of the most common debt consolidation qualifications for larger loans.
What’s the difference between debt consolidation and debt settlement?
Debt settlement plans are administered by debt settlement companies who negotiate with your creditors so that you can pay less than what you owe. Creditors will only agree to settle on your debt if you are delinquent on your payments or in default. This can hurt your credit score, since it shows lenders that you may not be a trustworthy borrower. The money you “save” from debt settlement can also be counted as income by the IRS and you can be taxed on it. With debt consolidation, you are still paying off the principal amount of debt you owe, just in a single loan. If you make your payments on time, this should not hurt your credit score.
Is debt management the same thing as debt consolidation?
While debt management is similar to debt consolidation, it is not a loan. A debt management program is administered by a nonprofit credit counseling agency, and they combine all your debts into a single monthly payment. From there, the credit counseling agency pays your creditors. Your payments will be lower than they would be otherwise, but not because your creditors are settling for less than what you owe. The credit counseling agency negotiates lower interest rates with your creditors.
Where can I find more answers to my debt consolidation questions?
If you still have more debt consolidation questions, or any other questions about debt, call a credit counseling agency. You can speak to a credit counselor about your financial situation, and they can help you figure out the next steps. Before you call them, make sure you do your research on that credit counseling agency. They should be a nonprofit, be a member of the NFCC or AICCCA, charge no minimum fees, and have certified credit counselors.
If you are struggling to pay off debt, ACCC can help! Schedule a free credit counseling session today.