Bills Logo

Consumer Debt Consolidation

Consumer Debt Consolidation
Daniel Cohen
UpdatedApr 15, 2024
  • clock icon
    4 min read

How to Get Out of Debt Using Consumer Debt Consolidation

Consumer Debt Consolidation: A Way Out of Debt

If you're like many people, you worry that your debt is so big you'll never pay it off. Every month you pay what you can, but paying the minimums on multiple cards and loans doesn't improve your situation. Consumer debt consolidation may be the solution you need to help you get out of debt and stay there.

Types of Consumer Debt Consolidation

Consumer debt consolidation comes in four primary forms:

Each form has positives and negatives. You may find that one or two types would be more appropriate for you. Your goal is to find the debt consolidation solution that is best suited to your financial situation.

Personal Unsecured Debt Consolidation Loan

If you don't own a home, you could apply for an unsecured debt consolidation loan. That means that you don't put up any collateral for the loan. You pay off all your debts with the consumer debt consolidation loan, which leaves you with one monthly bill for the new total. You must have excellent credit and a stable income to qualify. Since the credit crunch, fewer lenders offer this product and the ones that do have lowered the dollar amounts they lend. You might also discover that the interest rate is the same as the current rate on your credit cards, which wouldn't save you any money.

Credit Card Debt Consolidation

The average person frequently receives new credit card offers. If you have high credit card balances, you probably receive offers for low-rate balance transfers. If the credit line is large enough, you could transfer all your debts to one card. Before you accept the balance transfer loan, review the initial rate, full rate, rate expiration, and transfer fees. If the rate is 7%, but only lasts six months and has a 3% transfer fee, you won't save much money. On the other hand, a rate of 0% for 15 months with a 3% transfer fee could be just what you need to get out of debt without adding new interest charges. Both a personal loan and consumer credit debt consolidation can reduce your credit score, but continuing to be plagued by debt will hurt you more in the long run.

Cash-Out Home Refinance

If you own your home and it's worth more than your mortgage balance, a cash-out home refinance may be a better option than either credit card debt consolidation or a personal unsecured loan. By refinancing, you may be able to reduce the interest rate on your home, while also pulling out enough cash to pay off your other debts. As with your original mortgage, the interest on the refinanced mortgage is tax deductible, which would increase your savings.

When refinancing, beware of high refinancing fees. You should also avoid borrowing so much from your home's equity that you restrict your future options. If your home drops in value, below what you owe on it, you will have trouble selling your home, should you want or need to move. Always make sure that you can afford the mortgage payments on a cash-out refinance, even if there is an interruption in your income. Having six months of savings to cover your expenses is a prudent safeguard.

Home Equity Loan or Line of Credit

A home equity loan or line of credit also draws on the equity in your home. This is the best option for people with a low, fixed mortgage interest rate. Like a first mortgage, the interest on a second mortgage or home equity line of credit is tax deductible. A home equity loan allows you to borrow a fixed amount of money without altering the first mortgage. You would simply have two mortgage payments every month. A home equity line of credit (HELOC) gives you a credit limit that you can borrow against within a certain time period, often ten years. You can borrow as much or as little as you want, whenever you need, as long as you don't exceed the credit limit. Unfortunately, some people use HELOCs as personal credit cards, which puts their homes in jeopardy. While using a HELOC to pay off other credit cards can save you money and help you get out of debt, avoid drawing on the line of credit for luxury purchases and other non-necessities.

Consumer debt consolidation can help you get out of debt more quickly than continuing to pay the minimums on all your debts. If you're serious about getting out of debt, you can find the right solution to your debt problems. There are also ways you can tackle your debt on your own. Discover debt reduction help solutions you try yourself.

Another solution to solving your debt is by negotiating with your creditors. Learn more about debt negotiation and settlement.

Debt statistics

If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q4 2023 was $17.503 trillion. Student loan debt was $1.601 trillion and credit card debt was $1.129 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

Collection and delinquency rates vary by state. For example, in New Jersey, 16% have student loan debt. Of those holding student loan debt, 7% are in default. Auto/retail loan delinquency rate is 3%.

Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.