Here’s a list of the loans or credit facilities the average American has:
- Auto loan
- Credit cards
- Student loan
Put together, these loans can run well into $100,000 or more. It is no wonder consumer debt in the United States is at $13.86 trillion, an all-time high.
As long as you can afford them, having multiple debts isn’t a bad thing. But if you’re having trouble repaying them, you’re at risk of an individual debt crisis.
What should you do? Debt consolidation is a good idea!
But how does debt consolidation work? Keep reading for further insight.
What Is Debt Consolidation?
Before we dive into how debt consolidation works, let’s define what it is.
Debt consolidation is a refinancing process that involves taking out one loan to pay off multiple others.
If you’ve got multiple credit lines, you know how frustrating it can be to deal with multiple lenders, especially if your finances aren’t looking up. It can even be hard to know which loan charges what interest rate.
When you pursue debt consolidation, you’ll get a loan and use the funds to pay off all your loans. The result? You’ll have one lender to deal with!
How Does Debt Consolidation Work?
As a layman, the concept of debt consolidation might not make much sense. Why would anyone give you a loan to pay off your other loans, often at a lower interest rate?
Well, debt consolidation can be said to be a financial wellness product. If you’re struggling with debt, consolidation is a good way to secure a payment plan that suits your current financial situation.
Debt consolidation loans are offered by banks, credit unions, and private lending companies – the same institutions that offer the loans you’re looking to consolidate.
The first step is to work out how much you owe, the average interest rate charged on these loans, as well the average amount of time it will take you to fully pay them off.
For instance, let’s say you owe a combined total of $50,000. The average interest is 10 percent, and it will take you 24 months to pay off the loans.
In this case, your consolidation loan will have to be no less than $50,000, charging a lower interest, say 7 percent. You’ll also have a long period to repay the loan, say 3 years.
Under these consolidation loan terms, your monthly repayment bill will come down significantly.
Work with a Professional Service
Debt consolidation can be a complex financial process. On your own, you might not be able to pull it off. Even finding a suitable lender for your consolidation learn can be difficult.
This is why its advisable to look for a professional service, such as Debthunch, to help you. Be sure to check out this Debthunch offer on consolidation loans.
Debt Consolidation Works!
If you’re in financial pressure and you’ve got a couple of loans, you can consolidate them into one. And if you have been wondering “how does debt consolidation work?” you now have a clearer picture of what the process involves.
Keep tabs on our blog for more debt management advice and tips.