Is Debt Consolidation Right for You?

Searching for debt relief help can be overwhelming. How do you know if it’s right for you? How do you use a debt consolidation calculator to find the best loan for your situation? It can feel like you have more questions than answers.

Fortunately, debt consolidation companies are everywhere; most offer a wide variety of solutions to help individuals overcome large amounts of debt, while paying the least amount of interest. There are many types of consolidation loans to consider. 

From home equity loans to credit card balance transfers, you can be sure to find debt consolidation plans that fit into your lifestyle. The goal of consolidation is to compile all sources of debt into one, easy-to-manage loan, with one monthly payment. To learn more about consolidation, and to see if it’s right for you, continue reading the topics discussed below. 

How to Use a Debt Consolidation Calculator, and Why it Might Help

Using a debt consolidation calculator is one way to determine the total amount of money you can save by combining all debts into one loan. Most debt consolidation companies provide their own versions of these payoff calculators. 

When using a debt consolidation loan calculator, you must remember to include all sources of debt, not just the big ones. These include:

  • Personal loans.
  • Automotive loans and liens.
  • Credit card debt.
  • Student loans.
  • Medical debt.
  • Payday loans.

There is a variety of calculators available online. Most require users to input standard information about the amount of debt in their names. Likewise, most calculators work the same way. 

Simply find a debt consolidation calculator of your preference, and begin entering information about your debt. Some calculators place a limit on the total amount of debts you can enter. The Discover calculator, for example, only has nine slots. 

For each line of debt, you must provide the current balance, current interest rate (APR), payment type and monthly payment. It is important to note that the purpose of these online is to provide a rough estimate of savings. Any numbers or percentages are not guaranteed, and users must complete the application process to receive actual data. 

What is a debt consolidation company, and when might it be useful?

Is debt consolidation a good idea? Well, the answer depends on your current financial situation and the consolidation company you are considering. There are many debt consolidation companies out there that help borrowers settle their debts and manage payments. 

Any company that provides debt consolidation plans is known as a consolidator. These companies may be banks, credit unions or large financial institutions. They lend money to borrowers to pay off all debts, and make one, easy, monthly payment each month.

Some offer debt settlement programs, which entail negotiations between the company and the client’s money lenders. The goal of the settlement program is to barter for one, lump-sum payment that rids the client’s debts, so he or she can make one monthly payment. 

These companies may be useful for certain individuals, especially those with high amounts of credit card debt. Credit cards typically have the highest interest rates, which often leaves borrowers struggling to make minimum monthly payments. 

Borrowers who are meeting their monthly payments may not reap as many benefits. The process of debt settlement can take up to two years; borrowers who miss or stop making payments in the meantime will have that amount tacked onto the consolidation loan. 

How to Know if Debt Consolidation is the Right Plan for You

If you are asking yourself, “How does debt consolidation work?” it is important to get the facts straight, so you can decide if it will help or hurt your financial situation. The idea of paying less than you owe sounds enticing, but there are always a few strings attached. 

One way to determine if debt consolidation plans are worth your time and effort is to do some simple math. First, add up each line of debt at your current minimum payment rate and interest rate. Calculate how long it would take to pay off each credit card. 

Next, consider the length of the consolidation loan term you are interested in using. Most are five-year payment plans. Even if the loan has a lower interest rate, it will likely cost more over the long run than if you paid down your cards faster. 

If you are still wondering, “Is debt consolidation a good idea?” you should consider the total monthly payments you are making, alongside the total interest you are paying. If each line of your debt has extremely high interest rates, and you are already paying high monthly payments, a loan may be able to lower both, reducing the total amount you owe.

Debt consolidation loan rates are typically offered at lower rates than credit cards, making them attractive options to borrowers. However, it is important to remember that the loan consolidation company is just another lender; it will be added to your credit report, which could lower your overall score. 

What interest rates can you expect with a debt consolidation loan?

Debt relief loans typically offer lower interest rates than what borrowers are paying in debt. However, it is important to point out that loan rates vary wildly from company to company. Also, rates fluctuate, depending on the borrower’s situation.

Currently, debt consolidation loan rates range from as low as 5 percent to as high as 36 percent. This enormous difference can be attributed to different credit scores. The higher the borrower’s score, the lower the interest rate. 

To get the best interest rate on a consolidation loan, borrowers should aim to improve their credit scores. Those with good scores (typically 700 or higher) may even qualify for a balance transfer credit card with zero percent interest for the first year. 

Debt consolidation for bad credit scores may do more harm than good, especially if a borrower has a score less than 630. Many banks and financial institutions charge an average rate of 19 percent to borrowers who hover around that mark. 

Borrowers with poor credit might end up paying more in interest with a consolidation loan than they would if they continued making their monthly payments. It is important to consider all these factors before applying for a consolidation loan.