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An overview of debt consolidation

On Behalf of | Jun 15, 2021 | Debt Relief |

Debtors in Florida overwhelmed with debt often make hasty decisions, such as borrowing from retirement, which leaves them in a worse circumstance. Bankruptcy is an option debtors can pursue, but it also has consequences. A more sensible option for some debtors to reduce their financial obligations is debt consolidation.

Overview of debt consolidation

Debt consolidation is a type of debt relief that helps consumers easily pay outstanding balances by combining payments into one lump sum. While consumers primarily use consolidation for credit card debt, they may consolidate debt in various ways, such as credit card balance transfers, cash-out mortgages, personal loans or home equity loans.

It may seem counter-intuitive, but consumers who roll multiple debts into one can avoid missing deadlines and additional interest. They also pay debts faster with much lower interest rates as opposed to credit cards, which can take up to 20 years to pay making only minimum payments. In most cases, the debtor should pay the consolidated debt in three to five years.

When consolidation may make sense

Debt consolidation benefits consumers if their total debt doesn’t exceed 40% of their income. If the debtor foresees paying off their debt in five years or less, then a consolidation loan may work. Consumers with good credit scores who plan to change their spending habits and pay all the debt could benefit from debt consolidation. Debtors with good credit rating often receive lower interest rates. Most credit companies prefer a score of 690 or higher for balance transfer cards and 670 for personal loans. Debt relief options using collateral, such as home equity loans, need careful consideration.

If a debtor has a small amount of debt, using a lawyer to negotiate a lower payment with creditors may be a better option. A consumer with questions about debt relief may want to reach out to a lawyer for advice.