Debt consolidation refers to a method of managing debt where one or several debts are combined into a different type of financing. This could involve acquiring a debt consolidation loan or a balance transfer credit card to settle existing debts under improved conditions. The objective is to shift your debt to a lower APR than your current rate. This strategy can assist in reducing interest costs, decreasing monthly payments, and accelerating debt repayment.
Debt consolidation operates on a simple principle: settling one or multiple debts with a new loan. Common approaches to debt consolidation are personal loans and balance transfer credit cards.
The effectiveness of these methods depends on your specific circumstances, such as the amount of debt you need to consolidate, your credit rating, the urgency of the funds, the nature of your debt, among other things.
Personal loans allow you to merge various debts into a single monthly payment. Balance transfer credit cards enable you to move your credit card debt to a card with a lower annual percentage rate (APR). Home equity loans let you leverage your home's equity to clear your debt, using your home as security. Debt management plans, offered by certified nonprofit credit counseling agencies, help you pay off your debt within three to five years.
