Being in debt may seem like an overwhelming burden, but it doesn’t have to. There are many options available for taking control of your debt and getting it paid off in a timely manner. One popular method is to use a debt consolidation company. Another is to get a personal loan or a home equity line of credit.

debt consolidation loan application

We’ll take you through the basics of debt consolidation and how debt consolidation companies work so you can determine the best choice for yourself so you can be debt-free as quickly as possible.

What is debt consolidation?

Debt consolidation helps to eliminate multiple monthly payments to different creditors and replace it with a single payment. There are several different ways to achieve this and the best options typically save you money by giving you a lower interest rate or negotiating a lower settlement payment. It doesn’t mean the debt is gone, it simply changes your payment terms in some way to hopefully make your finances more manageable.

Most people turn to debt consolidation tactics when the majority of their debt is from credit cards. That’s because when you’re paying off huge credit card balances, it usually means you’re paying back interest almost exclusively. Credit cards have much higher interest rates than even certain unsecured loans you can get from a bank, so consolidating your debt can potentially save you a lot of money by lowering and simplifying your monthly payment.

What’s the best way to start the debt consolidation process?

Before weighing your debt consolidation options, it’s smart to have a free conversation with a consumer credit counseling firm. A credit counselor should be able to provide you with unbiased options, and they can warn you about making decisions that might not be ideal for your situation. If debt consolidation seems like the best approach, they’ll let you know and can help you find the best way to go about it, whether through a professional company, a personal loan, or another option.

A credit counselor is also a great resource for getting to the source of your debt problem. Whether you’re having trouble with your mortgage or can’t stick to a budget, a credit counselor is trained to review your finances and help you create an action plan for not only getting out of your current debt but also preventing future debt.

Before selecting a credit counseling agency, make sure it’s a reputable business. There are a number of listings you can consult to find the best ones approved by government standards. Also, take advantage of review and social media websites to see what customers are saying about them. Make sure the agency’s listed services match with what you’re looking for and ask about any fees upfront.

Most credit counseling agencies are non-profit organizations and should only charge minimal fees. You can also ask about what types of training and qualifications individual counselors receive before taking on clients such as yourself.

What exactly does a debt consolidation company do?

A debt consolidation company essentially pays off your debt balances on your behalf and you, in turn, take out a loan with the company which you repay over a certain amount of time. This is not the same thing as working with a debt settlement company, which can renegotiate the amount you owe. With a true debt consolidation company, you typically owe the same amount as you did before.

The difference from your original debt comes in two forms: the rates and fees along with an actual timeline for repayment. Remember that credit cards are a type of open-ended revolving loan, which means you can be charged interest practically indefinitely by just making the minimum payments. With a loan from a debt consolidation company, you’re given a set timeframe in which to pay off your loan. You know exactly how much each payment is going to cost and how long it’s going to take you to pay it all off.

On the downside, debt consolidation companies can charge extremely high interest rates and fees, particularly if you have low or fair credit. Still, the amount could still be lower than what you’re being charged on your credit card balances, so it’s important to analyze each option to see which is the least expensive.

See also >>> Best Debt Consolidation Loan Companies for 2017

How should you pick a debt consolidation company?

Before contacting a debt consolidation company, always make sure it is licensed. Over the years, the debt consolidation industry has been prone to scams, so proper research and caution are necessary if you want to avoid unscrupulous operations. Some such companies offer a real service, but their services will only put you deeper into debt. Other fly-by-night outfits might be a scam from the very start, asking you for money upfront. Never pay any money in advance of receiving a service.

If you’re getting a loan, any type of origination fee should come out of the loan funds before you receive them. You should never have to send any of your own money directly to a debt consolidation company unless you owe a late fee or some other type of administrative charge. Before signing a loan agreement, make sure you understand the exact terms of the loan, including any type of fee you can be charged and how quickly you’ll be charged a late fee.

Most companies should offer you a free financial analysis and provide both anonymous and confidential advice before asking you to commit to any course of action. It also helps to be aware of Federal Trade Commission regulations concerning debt consolidation.

A debt consolidation loan is a big commitment and isn’t one to be taken lightly. Always approach a debt consolidation company with caution and trust your gut. Also be sure you can afford your loan payments, otherwise you could get into even more financial trouble.

Are there other ways to consolidate debt?

When you’re deep in debt and trying to figure out solutions, it can be hard to make the right decisions. Depending how many debts you have, debt consolidation can be a great choice, provided you are careful about how you approach companies offering different services. With every type of debt relief option, it’s important to do your due diligence before you make a decision. The better informed you are about your options, the smarter your choices will be.

Personal Loans

In addition to taking out a loan with a debt consolidation company, there are also a great variety of online lenders who make personal loans to people with all types of financial backgrounds. While you might think of personal loans being used for things like pools, weddings, and vacations, debt consolidation is actually one of the most common uses for this type of loan.

Shop around for the best online personal loans to see what kind of rates you can qualify for. Most lenders provide pre-approvals that won’t affect your credit score so you can check your eligibility whether you have good credit or bad credit.

Low-interest Credit Cards

It may seem odd to fight debt with another credit card, but it can work in some instances. Many credit card companies offer low introductory APRs for transferring existing balances to the new card; in fact, some even offer a 0% APR for a limited time. Like any other deal that seems too good to be true, there are a few catches to be aware of.

The first is that you’ll likely need pretty solid credit to qualify for one of these credit card offers. The second is that once the introductory period ends, you’ll be back up to high interest rates — maybe even higher than your original cards. So if you don’t expect to pay off all your debt during that low-rate period, it might not be worth the effort. It’s just a matter of looking at the numbers to see what makes the most sense for your personal situation.

HELOCs

Secured loans for debt consolidation such as second mortgages or a Home Equity Line of Credit (HELOC) have even lower interest rates than personal loans. However, there does come the risk of putting up your home as collateral. But if you have equity in your home, you can access some of that cash through a HELOC.

You take out money as you need (say, to pay off your debt), then repay the line of credit at a low rate. You can borrow more money as you pay off the balance but be careful not to be trapped in a cycle of debt. As long as you’re careful, these risks might be well worth the benefits of saving money on high interest rates.