Debt consolidation is a term you hear often, but what is it? How does it work? Is it a good thing? Should I be consolidating my debt? Here are some details that everyone should know when considering debt consolidation:
What is Debt Consolidation?
Debt consolidation is when you take out a loan to pay off many others. It is often done to secure a lower or fixed interest rate or for the convenience of only having one loan to pay each month. You can do it on your own or you can choose to have a company consolidate your debt on your behalf. When you use a consolidation company they can arrange contact with all of your bill collectors to make payments for you. To do this they would need to know your monthly income and bills that may not be in collections. They then will set up a budget so that all of your bills that may be harming your credit score can be paid down a little at a time with one payment to the debt consolidation company each month.
The best type of debt consolidation is one that would allow you to make only one payment per month because they have paid off all your collectors completely; this also means that your credit score can begin to recover. When you make this payment the consolidation company will split it up between your bills. Usually a debt consolidation will charge you a start-up price then a monthly payment that is a percentage of interest on your total debt.
How long will it take me to get out of debt?
The length of the term on your loan would be dependent on two things: your income and the amount of debt that you have. To pay of the loan you will have to take charge on your payments and pay more than the minimum, when you only pay minimum a great deal of it is only paying off interest with little actually going towards your debt.
If you choose to work with a debt consolidation company they will help you to make a plan that will let you know how long the process while maintaining a standard of living that is acceptable. The average goal is to get you out of debt in 5 years.
Does debt consolidation work?
Ideally, yes. If executed properly debt consolidation can eliminate all of your debt and you can live without ever having a financial problem ever again. Some people can move on from their past mistakes and do this. Just be honest with your consolidation councilor and do not withhold any of your financial information, this will only come back to hurt your chances of managing your debts.
You also must not use debt consolidation as a bandaid. If you do not stop making bad financial decisions you will continue to have problems paying your bills. Stop overspending and live within your means, once you have your debt paid off do you really want to be in the same boat again?
How do I find a Debt Consolidation Company?
There are many companies which can help you make the right financial decisions. It may take some time to find the est company for your financial situation. It’s a good idea to make a list of questions to ask each company and to write down all their answers. You want to know things like how they will protect your privacy, what their fees are, how they charge for services, what are their policies on late payments, etc. A lot of this information may be available online as well.
Debt consolidation works only when you are dedicated to getting out of debt. It can be the best thing you ever did, but only when you understand it correctly and learn from your past mistakes. The best way to stay out of debt is to never get into debt in the first place.