Understanding Debt Consolidation

Several Options to Bind Debts Together

One of the most common methods of handling extreme debt situations is known as debt consolidation. This is the process of using a new, low-interest loan in order to pay off many or all of your other debt obligations. Where this money will come from depends on several factors. Whether or not you are a good candidate for debt consolidation also depends on several factors that your credit counselor will be able to explain to you. Generally these eligibility factors will include:

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• Strong credit score: In order to consolidate your debts you must first have a significant enough credit score that you can receive a debt from one of the various available methods (below). This means that you have not come for debt counseling after the situation is too late and you have been fighting with your creditors for a long period of time or had accounts sent to collections.
• Stable source of income: Getting a consolidation loan requires that you have a stable source of income capable of paying back the new loan, so this option will not usually be recommended to those who are struggling due to job loss or for medical reasons.
• Particular debt type: Not all debts can be consolidated very easily or at all - for example, if your only debt is a mortgage, then paying that off with a consolidation loan would probably be impossible, not to mention not worthwhile. In addition, debt consolidation is usually recommended for those who have many different debts such as credit cards and personal loans.
• Eligibility to secure a substantial loan:Getting a debt consolidation loan requires taking out a new loan, either through a revolving account (credit card), or based on of substantial equity, such as a home equity loan or a home equity line of credit.

Types of Debt Consolidation Loans

If you meet all of the debt consolidation requirements as prescribed by your counselor, then debt consolidation will possibly be the option they recommend to you after your detailed consultation. Again, whether or not they will recommend consultation depends on the factors above as well as whether or not you have a source for receiving a loan large enough to consolidation on.

• Credit card consolidation: Credit card consolidation is usually recommended only if you have either such a significant credit card history that you could likely convince another bank to give you a card with a large maximum limit, or if you have several small credit card or loan balances that can be managed with a standard $5,000 or $10,000 credit card. The trick with credit card consolidation is that it must be managed carefully and as quickly as possible, since credit card balance transfer options are also limited in their timing.
• Home equity loan consolidation: A home equity loan uses the equity in your home to take out a 2nd mortgage loan which you then can use to pay you're your other debts. This way rather than having many smaller, high-interest debts, you will only have to deal with your original mortgage and the new 2nd mortgage at a lower interest rate than your debts were.
• Home equity line of credit consolidation: A home equity line of credit is like a home equity loan except that it is a revolving account. This means that once you've begun to pay off the loan, you can charge to it again as often as you like until you reach the maximum available in the credit line.
• Personal loan consolidation: Not often used, the personal loan consolidation is managed by convincing a lender, such as a bank, to give you the amount of money you need in order to pay off other debts. This usually requires a near-immaculate credit score and the income to back up the total of all your current loans and your new one as well.

A Word of Caution on Consolidating

Your credit counselor will likely notify you as to the one trap that many people fall into when it comes to debt consolidation; that is taking out a new loan to pay off all of your other debts like credit cards and then, before you've paid off your new consolidation loan, starting to charge back your credit cards or acquire new debts. This is a huge and often financially terminal (see bankruptcy) mistake. If you go the route of debt consolidation you are best advised to cancel most of your paid off credit cards and only keep one or two for emergency situations only!