The specifics of how debt consolidation works will vary by the type of debt you have and the method you choose.
“Depending on the type of consolidation, there are firms that will negotiate any sort of debt that’s out there,” said Rod Griffin, director of consumer education for the credit bureau Experian.
A word to the wise, though: Debt consolidation loans aren’t for everyone struggling with debt.
While consolidating debt certainly has merits, it is not the right choice for every individual.
Above all, the approach has to match the need and the comfort level of the borrower.
Debt consolidation involves combining multiple unsecured debts into one bill, which can be helpful if you’re overwhelmed by an assortment of monthly payments.
You can consolidate a variety of debts, including credit cards, payday and personal loans, utility bills, and medical expenses.
So instead of having to send a separate payment to each creditor or collector every month, you’d make just one.
This can help eliminate missed or late payments and ensure that you’re addressing all your debts.“It can be really overwhelming when you have five credit cards to pay and you don’t even know where to start.I’ll sometimes float the idea of debt consolidation so they only have one bill to pay or so they can have a lower interest rate.” There are many options to consider when deciding to consolidate your debt, some of which work better in different situations.A home equity loan does not replace the existing mortgage as a cash-out refinance does, but it is another loan in addition to the existing mortgage.HELOCs differ from home equity loans in that, instead of receiving a lump sum of cash, borrowers have an agreed-upon amount that they can take from their equity, and access as needed over time. Cash-out refinancing involves replacing your mortgage loan with a new one for more than you owe, taking part of the difference between your old and new loans in cash. There are two categories: a federal Direct Consolidation Loan and private consolidation or refinancing options.You can consolidate most federal student loans with a Direct Consolidation Loan, which you can read more about here.