When debt starts to mount up, it can quickly become overwhelming. Fortunately, there are a few ways to get out from under a load of debt. In some cases, people can educate themselves on budgeting and get out of debt on their own. Others may benefit from services like debt relief or debt consolidation. Debt consolidation can be a great option for consumers who have a decent credit score and don’t have excessive debt.
What Is Debt Consolidation?
Debt consolidation is the process of rolling multiple, high-interest debts into a single, lower-interest loan. In general, a debt consolidation loan is used for credit card debt, short-term or pay-day loans, medical bills, and utility bills. It cannot be used for a mortgage, a home equity loan, or back taxes, however.
Who Qualifies For Debt Consolidation?
The best candidates for debt consolidation are people who have a credit score above 620 and whose debt obligations are less than half of their income. While it is possible to get debt consolidation loans with a lower credit rating, those loans are usually offered at a higher interest rate, so they may not offer many benefits.
What Documents Are Required?
Debt consolidation lenders will need to see proof of income, credit history, evidence of financial stability and, in many cases, collateral. For large loans, home equity may be used as collateral.
What Are The Different Kinds Of Loans To Consider?
There are several types of consolidation loans to consider. One option is to use a home equity loan to pay off existing debt. A related option is to release equity through a reverse mortgage or even by selling a home while retaining the right to live in it. Another option is a balance transfer, which involves transferring the higher-interest debt to a lower-interest credit card. Personal loans are another possibility for those who have a high enough credit score and income to borrow a sufficiently large amount.
Debt consolidation can be an effective and permanent solution to debt if consumers put a system in place to avoid borrowing money in the future. Credit counselors can help people learn more about budgeting and managing their finances in order to avoid future debt problems.