How Do Debt Consolidation Services Work – How Do I Consolidate Debt?

Written by admin on November 26th, 2010

Debt consolidation services are provided by a huge number of companies now, in the US, UK and elsewhere.  Before looking for consolidation services, it is important to understand how it works, because there is more than one way to consolidate your debt.  Reading this article will give you a clear understanding of how the different debt consolidation services operate, help you understand whether it may be an appropriate solution for you and tell you how to make sure you find the best companies.

Debt consolidation is primarily about reducing the amount you have to pay towards your debts each month, and making everything simpler by having only a single payment to make.  For some people, however, it means doing this by taking out a new loan to pay off all your old debts, and for others it means setting up some sort of payment plan with a debt company.  Both are perfectly legitimate ways to consolidate debt, but there are pros and cons with each option and it helps to have an understanding of when each form of consolidation might be suitable.

Taking out a new loan when you are deep in debt is always something to be very cautious about.  More often than not, the best debt solutions do not involve taking on more debt.  A new loan can be the answer is some circumstances, but they are more often used inappropriately, which can actually make your situation worse.  This shows how debt consolidation services can sometimes backfire as a result of a company offering poor advice simply in order to sell a product.

The two commonest mistakes people make with loans is to not consider how much they will be paying back in total, and which debts they should actually be consolidating.  If a lender offers you a loan that leaves you with a much reduced monthly payment, it may just be because you are paying it off for much longer, and that this will actually cost you a lot more by the time you have reached the end of the loan.  Work out what it would cost to carry on paying off your existing debts, and compare that with how much you will have paid by the time your loan is fully repaid.

A lender may well want you to consolidate all your debt in a new loan, but you should take care not to include any debts you have that are at a lower rate of interest than the loan they are offering.  Some of your debts may be at quite low interest rates, and if you pay a creditor off by borrowing money at a higher rate of interest, you are just paying out more than you need to.

The other meaning for how debt consolidation services work is the provision of a debt management plan.  This is the most widely used and effective way to consolidate debt and in the US in particular, setting up a debt management plan is often what people mean by debt consolidation.  This is a process where a specialist advisor negotiates with your creditors and gets their agreement to make reductions in the amounts you have to pay.  This is done by reducing interest charges and often writing off excess charges and penalty fees.

When this process is complete for all your creditors, you just make one affordable monthly payment to the consolidation services company, and they deal with your creditors for you.  One advantage with this route is that you do not borrow any more money, and all efforts are directed towards immediately reducing the amount you have to repay.

The single most important that will determine how well debt consolidation services work for you is which company you decide to work with.  You need to be sure that you are going to get honest advice and be told which option is better for your particular needs, rather than which consolidation services are more profitable for them to provide.

A good safeguard is to apply to at least two or three companies before making any decisions.  All the leading consolidation services companies make it easy to apply for help by providing simple online forms.  You just complete one of these and they then get in touch to go through your situation in greater detail. Ideally you should start off with a list of recommendations for companies that have a proven track record of reliability and success.

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