Stumble Shares 9 Have you been keeping an eye out for the best way to save money with debt consolidation? By definition, debt consolidation focuses not so much on saving you money as it does reduce the number of debts you hold. If you go through a process that turns five debts into one debt, then that process is a form of debt consolidation.
That said, the best debt consolidations do end up saving the debtor a ton of money both now and down the road. Ideally, you get out of debt faster, and for less money than you would have otherwise. The sources of these savings are usually the saved money from reduced interest rates, lower monthly payments, and sometimes, even a dramatically reduced overall debt load. How these savings happen, depends on the type of debt consolidation you end up with.
Under this rather wide umbrella, a few methods of debt consolidation are definitely more popular than others are. These low-to-no interest promotions attract new cardholders by limiting the amount of accruing interest on their accounts. You open up the new card and immediately use it to pay off all your other debts, consolidating them to one single credit card.
Then, you do your best to pay that credit card off before the promotional interest rate ends, ideally without using it for any other purchases.
A balance transfer credit card saves you money by drastically decreasing the amount of interest you pay on your debt over time.
Interest, not the principal amount of the debt, is usually what makes paying off debt so onerous. It adds up quick and compounds exponentially over time, adding quite a bit to your total debt burden. By using a balance transfer credit card, you essentially freeze the compounding of interest on different credit cards so that every dollar you pay goes toward repaying the actual debt. A word of warning, if you consolidate your debts with a balance transfer credit card, make sure that you hold yourself back from actually using the card or any other credit card, for that matter.
Personal loans Consolidating your debt with a personal loan is probably the most common debt consolidation method and, generally, what people think of when they think about debt consolidation.
You go to a lender and apply for a loan equal to the total amount of all of your debt. These debt consolidation loans generally come in two varieties: With an unsecured loan, all you have to do is sign on the dotted line and the loan is yours. Lenders typically offer secured loans to people with less-than-stellar credit, or those asking for larger amounts. They may also try to sweeten the pot by offering reduced interest rates for secured loans.
By their calculations, this makes sense: Still, unsecured loans are generally preferable for people seeking debt consolidation. How do personal loans for debt consolidation save you money?
In most cases, personal loans come with much lower interest rates than other common forms of debt such as credit cards. In many cases, they may also reduce the total amount that you pay each month to your creditors. Usually, these credit counselors are non-profit organizations, but not always. Part of your debt management program will likely be simple financial education: Another part may be enforced financial discipline.
You may not be able to spend on credit, and some programs may even require you to close your credit accounts in order to enter the program. The debt consolidation here comes from the payments that you make to the debt management company.
In fact, this is where the savings come in. Debt management companies are adept at negotiating with creditors to win concessions such as reduced interest rates and even decreased overall debt. Your creditors agree to take slight reductions in payments as long as the payments keep coming.
Debt settlement Debt settlement has some similarities with debt management. With debt settlement, you pay a third-party company a set amount each month instead of paying all your various creditors, essentially consolidating your debt payments. And, that company does negotiate with your creditors on your behalf. Debt settlement is a much more aggressive form of consolidation that potentially comes with much bigger savings.
With debt settlement, you hire a third-party company to attempt to settle your debt for good, not just help you to pay it off. You cease all payments to your creditors, instead of paying a lump sum to the debt settlement company each month that goes into a savings account. A good debt settlement company will be able to handle the brunt of the harassment for you, but your credit score will likely take a hit.
That goes double if your debt settlement agency forces you to close your existing lines of credit down as well. These drawbacks are worth it much of the time, though, if the debt settlement company succeeds at settling your debt. Many creditors take this deal. How does debt settlement save you money? The real savings, however, comes from the settlement itself. Debt settlement companies make their names by getting creditors to agree to accept debt payments that are dramatically less than the total amount owed.
When a debt settlement goes smoothly, the overall savings are hard to beat. Which type of debt consolidation will save you the most money? While there is no simple answer to this question, there are ways to estimate what your best option would be.
How to use our free debt calculator Using our debt calculator is simple. To find that, all you need to do is check your balance sheets and add up the figures.
Just look up the interest rates of your debts, add them up, and divide by the total number of debts that you have.
Finally, input your desired program length. This is how long you want your debt relief program to run. The shorter the program, the higher your monthly payments will be, so be sure to play around with this number to find the program length that works for you.
Once you have these numbers, hit calculate.