How does debt consolidation work?

Debt consolidation is the process by which you refinance your existing debt so that you can pay it off at a lower rate of interest and at better terms.

debt consolidation

Cheap debt remains available to many financial buyers that still have plenty of “dry powder”

This form of debt refinancing is designed to make it easier for consumers to repay their debts. Debt consolidation is geared towards grouping a myriad of similar debts together (medical bills, credit card bills, and personal loans) into a single repayment with a debt consolidation loan.

Some people prefer to transfer all their outstanding debt to a 0% APR credit card, or low-interest rate credit cards with low balance transfer fees. Others prefer to opt for a debt consolidation loan at a lower rate of interest than the prevailing interest rate on the outstanding debt.

Over the years, various bank and non-bank debt consolidation companies have sprung up. The CFPB (Consumer Financial Protection Bureau) recognizes the legitimacy of licensed operators.

Dealing with Reputable Debt Consolidation Companies

Clients are advised to conduct the necessary research to ensure that the debt consolidation companies are above board. Companies that masquerade as debt consolidation companies may actually be debt settlement companies.

They offer a different service in that they will negotiate with your creditors to lower your debts, provided you make payment into an account. These debt management companies will then negotiate with creditors to try and reduce the amount of your debt, but it comes with attendant risks. These risks relate to the impact on your credit score.

If you settle with your creditors, they may report you to the credit bureaus, resulting in your credit score taking a hit.

Debt consolidation is a useful option to employ especially when you haven’t yet defaulted on your debt obligations. It is typically employed with unsecured debt such as credit card debt, student loans, and personal loans.

The problem with debts that are in arrears is that debt collection agencies could be called to recover their debts. Not only can this lead to legal proceedings, but it’ll also reflect negatively on your credit report.

This is certainly not an advisable avenue for clients. Failure to repay debts as part of a debt settlement program can result in punitive measures such as increased debt burdens, negative reporting against you, and it’ll likely be much more difficult for you to negotiate favourable credit lines in the future.

Why is Debt Consolidation a Prized Option Today?

Consider that the typical American household is indebted to the amount of $134,643. This debt includes a combination of personal loans, business loans, credit card debts, student loans, mortgages, overdue invoices, automobile loans etc.

It’s important to have a clear understanding of debt consolidation. The goal with debt consolidation is to reduce the amount that you are paying in interest on your outstanding debt. The typical American household pays approximately $110 per month in interest alone. That amounts to $1,300 + per year. By opting for a debt consolidation loan, you can reduce the total payments vis-à-vis interest, and use that towards paying down the principal balance on the loan.

That amounts to $1,300 + per year. By opting for a debt consolidation loan, you can reduce the total payments vis-à-vis interest, and use that towards paying down the principal balance on the loan.

Debt consolidation should be used in addition to a range of other services such as credit counseling. A sound understanding of how to manage your finances is essential. A credit

A credit counselor works alongside you to structure a payment plan best suited to your needs. The other option is debt settlement, which is effectively a renegotiated payment plan with your creditors.

In either case, it’s important to adopt a proactive approach to managing your debt. When you choose a debt consolidation loan as your preferred option, you won’t have to deal with multiple loan repayments simultaneously, or on different dates.

A debt consolidation loan manages multiple debt repayments by consolidating them into a single loan, typically at a lower interest rate than you are paying.

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