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Is a Debt Consolidation Loan Different from Debt Consolidation?

Is a Debt Consolidation Loan Different from Debt Consolidation?

by

JG Wentworth

May 14, 2024

7 min

is debt consolidation same as a loan

In the realm of personal finance, few topics cause as much confusion as the concept of debt consolidation. The mere mention of these two words often conjures up images of finally streamlining those pesky credit card balances and loan payments into one convenient package. However, many individuals fail to grasp the subtle yet crucial difference between the overarching strategy of debt consolidation and the specific tool known as a debt consolidation loan. 

What is debt consolidation? 

At its core, debt consolidation is a broad approach to managing and simplifying multiple outstanding debts. It involves combining various forms of debt, such as credit card balances, personal loans, medical bills, and others, into a single, streamlined obligation.  

Why would I pursue debt consolidation? 

The primary objectives of debt consolidation are threefold:  

  1. Secure a lower interest rate. 
  2. Simplify the repayment process by having just one monthly bill. 
  3. Potentially obtain more favorable loan terms. 

Okay, so what exactly is a debt consolidation loan? 

Debt consolidation can be achieved through various means, each with its own set of advantages and drawbacks. One of the most popular and straightforward methods is the debt consolidation loan. 

A debt consolidation loan is precisely what its name implies – a new loan obtained with the sole purpose of consolidating multiple existing debts. Here’s how it typically works: 

  1. You apply for a debt consolidation loan, often through a bank, credit union, or online lender. 
  2. Upon approval, you receive a lump sum of money from the loan. 
  3. You then use that lump sum to pay off all of your outstanding debts, effectively consolidating them into a single loan. 
  4. Moving forward, you make one monthly payment toward the debt consolidation loan, ideally at a lower interest rate and with more favorable terms than your previous debts. 

 

By consolidating through a loan, you effectively trade multiple debt obligations for a single, streamlined payment. This simplifies your financial life, reduces the risk of missed payments, and, if secured at a lower interest rate, can potentially save you a significant amount of money over the life of the loan. 

However, it’s crucial to understand that a debt consolidation loan is merely one tool in the debt consolidation toolbox. There are other methods available for consolidating debt, each with its own set of pros and cons. 

What are the drawbacks of getting a debt consolidation loan? 

While debt consolidation loans offer many individuals an opportunity to regain control of their debt and pay it off accordingly, there are also some potential consequences to implementing this method, a few of which include: 

  • Upfront fees: Many debt consolidation loans charge origination fees, which can add to the overall cost of the loan. These fees are typically a percentage of the total loan amount. 
  • Lower credit score impact: Taking out a new debt consolidation loan can result in a hard inquiry on your credit report, which can temporarily lower your credit score. Having a new loan on your credit report can also negatively affect your credit mix. 
  • Secured debt requirement: Some lenders may require you to secure the debt consolidation loan with collateral like your home or car. Failure to repay could put those assets at risk. 
  • Temptation to accrue new debt: Without lifestyle changes, the open credit lines from paid-off debts may create a temptation to accrue new debt on top of the consolidation loan. 

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What are some other methods of debt consolidation? 

Balance transfer credit cards allow you to consolidate multiple credit card balances onto a single card, often with an introductory 0% APR period. Home equity loans or lines of credit (HELOCs) enable you to tap into the equity of your home to consolidate debts. Alternatively, you could enroll in a debt management plan through a credit counseling agency, which negotiates with creditors on your behalf to consolidate and potentially reduce interest rates and fees. 

If you’re in the market for a debt consolidation loan…* 

Why not give JG Wentworth a try? We have personal loan options that can help you consolidate your debts, and applying is as easy as 1-2-3: 

  1. Check your rates with no impact to your credit score. 
  2. Choose the offer that works best for you. 
  3. Easily upload documents online.

 

Loan proceeds will directly pay off your debt and any remaining balance goes directly into an account you designate. Contact us today to speak with a dedicated personal loan specialist who can talk you through the process in more detail and answer any questions you may have. 

In summary 

  • Debt Consolidation = The process/strategy of combining multiple debts into one. 
  • Debt Consolidation Loan = One method of facilitating debt consolidation by taking out a new loan. 

The terms are often used interchangeably because a debt consolidation loan is one of the most common ways to implement a debt consolidation plan. The optimal consolidation method for your unique circumstances will depend on factors such as the total amount of debt, your credit score, available equity in your home, and your overall financial goals. 

Ultimately, while a debt consolidation loan is a powerful tool, it is essential to recognize that it is merely one component of the broader debt consolidation strategy. By understanding the distinction between the two concepts, you can make informed decisions and chart a course toward a debt-free future that aligns with your specific needs and financial objectives. 

*JGW Debt Settlement, LLC d/b/a JG Wentworth (“JG Wentworth”) has partnered with Even Financial, Inc to provide this loan referral service. JG Wentworth is not a lender and cannot ultimately decide whether or not you are approved for a loan. JG Wentworth does not determine or influence the amount of money you may receive from using this referral service. 

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