What exactly is debt consolidation and what can it actually do? Is it as much of a magical fix-all as it sounds?
The short answer, probably not.
Okay let’s start with what is debt consolidation. debt consolidation is getting a new loan to pay off all your other loans. This way you would only be paying one creditor and it would simplify your payment process. Ideally, this new loan would be at a lower interest rate, saving you money.
The biggest problem with that consolidation, however, is that those who have the greatest need for debt consolidation, often have the hardest time getting it. This is because these individuals often have very bad credit. When they are searching for a new lender to consolidate their debt under, it is very difficult for them to find someone that will give them a lower interest rates than their other debts.
Debt consolidation might still make sense, even if you have bad credit, when most of your debt is credit card debt at a very high interest rate.
The type of individual that debt consolidation might work well for, is someone that has many debts but has still maintained a high credit score.
If you don’t have good credit, don’t lose hope. As you are trying to build your credit, continue to check what interest rates lenders are willing to give you and you might be surprised to see what lenders are willing to do.
A great place to check loan rates and get loans is LendingClub. It is a peer-to-peer lending site that has given thousands of individuals access to loans without going to a bank.
To summarize, debt consolidation might help some individuals but is far from a fix-all. Paying off large amounts of debt will take tremendous effort and discipline now matter your credit score but your future will be thanking you for decades.