- 5 min read
- Consolidation loan is a type of debt relief option.
- You can also do a payment loan consolidation.
- Make sure that you can afford payments in your debt relief options.
Making Sense of Consolidation Loans and Debt Loan Options
Confused? Looking for debt relief options is not easy. There are many different debt relief solutions. It is hard to understand them, let alone choose between them.
Debt loans, consolidation loans, loan consolidation, debt loan consolidation, or debt consolidation loans... No wonder you are confused. Loan Consolidation is a broad term that includes:
- Debt loans or Consolidation loans: These refer to taking out new a loan to pay off old debts.
- Payment Consolidation or debt consolidation: These refer to a long-term solution to pay off old debt by making one payment to a third party. You do not take out a new loan, but consolidate eligible loan, credit card and other debt into one payment.
Still confused? Rightfully so. It is very confusing to use the same term to mean different things and then compare. Instead of getting up hung in a discussion of different terms, let’s focus on a way to get you on the best path to your debt relief solutions.
In order to make things clearer, learn that a:
- Consolidation Loan is a Debt Loan
- Payment Loan Consolidation is a Debt Consolidation Solution
Quick tip #1
Looking for the right debt relief solution? Use Bills.com innovative tool, Debt Coach, to help you analyze your financial situation and goals and give you a personalized debt relief recommendation.
Consolidation Loan is a Debt Loan
Consolidation loan or debt loan consolidation or loan consolidation are all terms used when you take out a loan to pay off other debt.
Debt Loans is a broad term and refers to student loans, auto loans, home loans, and personal loans. You take a debt loans to buy new items, refinance old loans, or consolidate different debt into one loan.
Types of Consolidation Loans: One popular debt relief option is a consolidation loan. Here are the different types of consolidation loans:
- Student Loan Consolidation: If you have many student loans, either federal or private, then you can consider a student consolidation loan.
- Cash Out Refinance: If you have a good credit (score and history), a low debt-to-Income (DTI) ratio, and sufficient equity in your house, then a cash out refinance can consolidate your credit card and other debt into a long term mortgage loan.
- Unsecured personal loan: If you have good credit, low DTI ratio, then consider an unsecured personal loan to pay off debt that has a higher interest rate.
The main reasons to take out a consolidation loan are:
- Simplify your payments: It can be difficult to keep track of many different bills, especially student loans. Having one loan simplifies the payment process, making sure that you make all your payments on time.
- Lower you interest rate: Credit card debt can carry very high interest rates. If you don’t manage your payments correctly and pay only minimum payments, then you will pay off you debt in an extremely long time. Shop around for lower credit cards (balance transfer) or a lower interest rate unsecured personal loan, although those are hard to find.
- Lower your monthly payment: If you cannot afford your payments, but do have equity in your house, then you can move your credit card and personal debt to your mortgage through a cash out mortgage refinance. This form of loan consolidation transfers the risk of your debt directly to your house. Make sure that you can afford the new payments.
Quick tip #2
use the equity in your house to consolidate your debt into a cash out mortgage refinance. get a mortgage quote from a bills.com lender.
Payment Loan Consolidation is a Debt Consolidation Solution
Another debt consolidation solution is combining your different debt into one monthly payment. Technically this is not a loan consolidation, because you are not taking a new loan
The two types of payment consolidation are:
- Debt management program (DMP): Debt management is the second step of a credit counseling program. First, you receive financial counseling and budget keeping advice. If you can maintain the minimum required payments, a debt management company negotiates lower fees and interest with your creditors. You make one payment to an account that the debt management uses to pay off your monthly bills. Your debt is paid off completely over a five-year period. One advantage of the DMP is that you have to make only one payment and your credit card debt is paid off. This way you avoid making minimum payments. The debt management company takes monthly fees for the service, so make sure that your overall financial savings makes this plan worthwhile.
- Debt settlement: If you cannot make the minimum payments, but can make substantial payments on your debt, then a debt settlement program can help you. In a debt settlement program you stop paying your creditors. (You take a big hit on your credit score, but you are struggling to pay your bills and already have bad credit). While you are making monthly payments into a special, designated account in your name, the debt settlement company negotiates a onetime payoff. Once a settlement is reached, your money is used to pay off the creditor and the debt settlement company. Be careful; do not pay any upfront fees.
Quick tip #3
Not sure if a debt settlement, payment consolidation plan is right for you? Get in touch with a prescreened Bills.com debt providers for a no obligation free consultation.
Consolidation Loan, Debt Loan - Make sure it is Debt Relief
Whether you choose a loan consolidation plan, payment consolidation plan or any other debt relief solution, use Bills.com articles and tools to help you better understand your choices. Make sure that you understand your options and that you have the funds to make it work.
Dealing with debt
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q2 2022 was $16.15 trillion. Auto loan debt was $1.50 trillion and credit card was $0.89 trillion.
A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by Urban.org from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.
Collection and delinquency rates vary by state. For example, in Delaware, 15% have student loan debt. Of those holding student loan debt, 8% are in default. Auto/retail loan delinquency rate is 4%.
To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.