How Does Debt Consolidation Work?

Debt consolidation is a financial tool and repayment process that involves combining multiple debts into just one. There are a few ways that you can consolidate debt, such as consolidation loans or a balance transfer credit card.

Debt consolidation options come with risks and benefits, so it’s crucial to understand how to consolidate debt responsibly and if it’s a wise decision for your financial situation. In this Tower Loan article, we cover the pros and cons of debt consolidation, as well as the effects on credit and decision-making tips.

What Is Debt Consolidation?

Consolidating debt is a strategic move that could help you simplify your life and save money. When you combine more than one debt into just a single debt, you change your monthly payment obligations and potentially your financial outcome for the future.

Among the most popular debt consolidation options is a debt consolidation loan, also known as a personal loan. You can also sign up for a balance transfer credit card or debt management plan to consolidate debt.

You might be a good candidate for debt consolidation if you need a more streamlined way to manage your monthly payments or can’t afford your current payments. If you can qualify for a low interest rate and commit to making payments on time, you could resolve your debt quicker and avoid debt in the future.

Benefits of Debt Consolidation

In general, is debt consolidation a good idea?

There are many enticing benefits to debt consolidation that may lead you to learn more about how to consolidate debt. For example, you’ll simplify your payment and have fewer monthly bills to track and manage. You may also get a lower interest rate for potentially reduced costs. Low-interest personal loans and 0% APR balance transfer credit cards can help reduce your interest obligations.

Another benefit of debt consolidation is the opportunity to improve your credit by paying off past-due accounts and reducing your credit utilization. When you repay your debt faster through a debt consolidation loan, you minimize the interest required and have a shorter payoff time. Building your credit history strengthens your financial flexibility as long as you improve your payment history with consistent payments on the newly consolidated debt.

Drawbacks of Debt Consolidation

However, consolidating debt may also involve some risks and drawbacks for certain people.

First, upfront fees could apply, such as an origination fee of around 1% to 6% for debt consolidation loans or 3% to 5% for balance transfer fees. Qualification challenges may affect you, as people with poor credit often have more difficulty obtaining favorable offers.

Additionally, there’s the general risk of taking on more debt. If you aren’t careful with your spending and committed to a budget, you could be tempted to spend more on newly freed lines of credit after debt consolidation. And yes, there are potential credit score impacts associated with various debt consolidation methods.

Tower Loan understands these concerns and is committed to mitigating these drawbacks to provide the best debt consolidation option. Our personal debt consolidation loans come with an affordable and predictable payment plan with competitive interest rates and an online application process.

Does Debt Consolidation Hurt Your Credit?

Many people are hesitant to pursue this financial tool because they wonder, “Does debt consolidation hurt your credit?”

As you learn the answer to “What is debt consolidation?”, you should know that credit has temporary and long-term impacts. For instance, the hard inquiry required during the debt consolidation loan application process creates a temporary hit to your credit. After applying for debt consolidation options, you may also see temporary changes in your credit utilization and account mix.

However, there are also long-term credit benefits to keep in mind beyond these temporary effects. If you are able to pay down your debt due to debt consolidation, you will improve your credit score over time.

Debt consolidation options are also excellent opportunities to rebuild your payment history if you have had financial hardship in the past. But if you miss payments on your new debt, you could find yourself in a worse financial position than where you started.

Should You Consolidate Your Debt?

Is debt consolidation a good idea for you right now?

First, evaluate your current financial situation and assess your income stability and budgeting skills. You’ll also want to consider your current credit score and check your loan eligibility if you take out a debt consolidation loan.

Next, think about your motivation to consolidate debt. Are you dedicated to sticking to a new repayment plan? Can you make a different amount for your monthly payments based on your income? Can you avoid overspending and stick to a budget to gain the benefits of debt consolidation?

There’s also a mindset check that needs to happen as you consider how to consolidate debt. Consolidation should be used as a strategic tool, not a crutch when you have no other options left. It’s essential to address the root causes of your debt before consolidating, which may involve honest and difficult conversations with family members or a financial counselor. 

How to Choose a Debt Consolidation Option

As we’ve discussed, there are three primary avenues for pursuing debt consolidation options. Here are some tips for how to choose the right one for you.

Balance Transfer Credit Cards

Balance transfer credit cards are best for people who have fair-to-good credit. It is less likely that you will qualify for an advantageous interest rate if your credit score is low and your credit history is challenging. If you can repay your debt within the 0% APR period on a balance transfer card, you will set yourself up for success in repaying your debt.

Debt Consolidation Loans

Debt consolidation loans are excellent options if you have larger debts or prefer predictable fixed monthly payments to keep you on track with your financial goals. You can look for debt consolidation loans from banks, credit unions, and online lenders.

When shopping around for debt consolidation loans to pay in installments, look for low-interest loans with minimal fees, like the ones we offer at Tower Loan. To apply for a debt consolidation loan, you’ll typically need to provide proof of identity, proof of income, and your social security number.

It also helps to have an in-person loan office nearby to assist you with any questions from the initial application to the final payoff. At Tower Loan, we have over 250 locations across six states to serve you locally.

Steps to Consolidate Debt

So, how does debt consolidation work in practical terms?

Here are the basic steps involved in pursuing debt consolidation to take control of your finances:

1. Evaluate your current debt and calculate all total balances.
2. Compare your consolidation options, including personal loans, balance transfers, and credit counseling.
3. Check your credit score and prequalify for offers to assess your best options.
4. Choose the option with the most savings potential.
5. Create a repayment plan and stick to it to stay on track.

Something else to keep in mind as you pay down your debt is to monitor your credit score. There are free credit monitoring services that you can sign up for to get real-time alerts when there are changes to your credit report. This is a proactive way to address issues right away to minimize potential damage to your finances.

Tower Loan Can Help with Debt Consolidation

We hope you’ve found this discussion of what debt consolidation is useful and now have a better understanding of whether it’s a good option for you.

At Tower Loan, we cater to clients with varied credit backgrounds to provide inclusive service and tailored solutions that fit your debt consolidation needs. When you work with us, you can consolidate your debt without ever leaving your home because of our accessible online application process.

If getting a debt consolidation loan feels like the right move, we are here for you. Apply online or visit a location near you in Louisiana, Mississippi, Missouri, Illinois, Texas, or Alabama. We’re happy to answer all your questions about what debt consolidation is and how to consolidate debt in the most beneficial way possible.