How Debt Consolidation Works: Tips and Tricks

Debt is the kind of thing that can sneak up on you. Whether it’s credit card debt, auto loans, student loans, your mortgage, or a mix of them, you can wake up one day to find that servicing your debt burden takes up an inconveniently large chunk of your income.

If you do have a large number of outstanding payments, you might want to consider consolidating your debt in order to streamline your finances. This won’t make your debt disappear, or even reduce the capital owed, but it may reduce the interest and therefore your monthly payments. If you’re considering combining your loans or need more information, here’s a detailed guide on how debt consolidation works.

Understanding Debt Consolidation

In a nutshell, debt consolidation is paying off multiple loans, or even a single high-interest loan, with a new loan. The new loan is often provided at a lower interest rate, making it cheaper for you to pay it off.

For example, let’s say you have $25,000 in credit card debt split among multiple cards, each with an interest rate of 25%. If you take out a debt consolidation loan with an interest rate of 12% over a five-year period, you could pay off that debt faster and more cost-effectively.

The way consolidating your debt works is that some lenders, such as Lending Tower, will offer you specialized debt consolidation loans that are structured to help you pay off your debt sooner or increase your credit score. However, you can also use most standard personal loans to achieve the same outcome.

Tips for Debt Consolidation

While debt consolidation is a useful tool, the way you go about it can help you draw more value from the process and improve your situation.

1. Get the Best Payment Terms 

Debt consolidation is a good option for long-term debts with high rates of interest. Revolving debt, such as outstanding credit card amounts, is an ideal candidate for debt consolidation since the interest rates are higher and the debt can linger on your credit report for longer. As you work at consolidating your debt, consider the interest rates on offer. While the average credit card APR is nearly 23%, the average interest rate for personal loans is 12.36%.

2. Source a Range of Loan Options

It’s important to remember that you have a number of options when it comes to lenders. Don’t hesitate to approach as many as possible to secure multiple loan offers and settle on one that works best to help consolidate your debt. It’s worth remembering, however, that hard credit checks, which banks usually perform to determine your eligibility, can affect your credit score.

Alternatively, an online lender like Lending Tower typically only performs a soft credit check prior to sending you loan options. What’s more, with us, you typically receive a range of options, so that you can select the best fit for your needs.

3. Apply for a Balance Transfer Card

Another way you can work towards consolidating credit card debt is by using balance transfer cards. These are usually promotional credit cards offered to you when you switch banks. Balance transfer cards come with a very low APR, sometimes as low as 0%, offered for six to 21 months. You can transfer your outstanding credit card balance to the new card and pay it off at a much lower rate, saving you some money.

4. Roll Your Debts Into Your Mortgage

A mortgage is a secured loan and is usually offered at a lower interest rate than unsecured debts, such as from your credit card. As a result, if you’re a homeowner, you can roll your outstanding high-interest loans into your mortgage to consolidate your debt and work it off at a lower interest rate. It’s worth remembering, though, that mortgages come with a longer payment period, so you may be stuck with a larger debt load for a longer period of time.

5. Find a Credit Counselor

If you’re unsure of how to go about the process or if you have a significant debt burden, consider approaching a credit counselor. A number of them are attached to nonprofits and charge very low fees. A professional debt reduction agency may even do the work of consolidating and taking on your debt by negotiating with your lenders on your behalf to lower your interest rates. You then pay off your debt to the agency at a fixed rate of interest.

Simplify Your Finances With Lending Tower

At Lending Tower, we understand the difference a stress-free financial life can make. We’ve helped thousands of customers across the nation achieve their financial goals with low-interest consolidation and personal loans. See rapid approvals, minimal hassle, and interest rates as low as 5.99% with a reputed online lender. Reach out to one of our lending specialists 24/7 to learn more about how consolidating your debt works with Lending Tower.