How Debt Consolidation Works

The advertisements are tempting: “Call now to reduce your monthly payments and become debt free!”, but exactly how does debt consolidation work?

Simply put, debt consolidation is the process of combining all your payments on unsecured debts that you owe creditors into one monthly payment. Its purpose is to allow people who are finding it difficult to manage a variety of debts to consolidate or merge all of their arrears into one. Debt consolidation programs provide the benefit of reduced interest rates or overall debt.

However remarkable the claims put forth by debt consolidation companies may seem, the reality is that there is no magic formula that will instantly eliminate your debt. Quite frankly, obtaining a debt consolidation loan means you will be getting new debt. Done right, it can be a helpful tool to help you get out of debt.

What kind of debt can I consolidate?

It’s important to note that only unsecured loans can be consolidated. These are loans that aren’t backed by assets, such as credit card debts, unsecured personal loans and some student loans. Having to deal with several debts can be overwhelming. Being able to combine all your unsecured debt so that you can make one monthly payment helps you become more organized financially and can provide the benefit of lowering your total payments each month, making debt consolidation quite appealing to many.

When is it time to consolidate?

Just because you have debt doesn’t mean that you need to reorganize your finances. There are a few signs that indicate when it’s advantageous to obtain debt assistance through loan consolidation:

  • You find yourself consistently making late payments.
  • You are only able to pay the minimum amount due on your credit card bills.
  • You need to borrow money to pay for expenses like food, rent and gas.
  • You are using more than 20 percent of your paycheck to pay off debts.

Is it too good to be true?

As with making any major money-related decisions, you need to make sure you understand what you are getting into. Thoroughly arm yourself with all the information you can get before you finalize anything so you can take control of your finances. Obtaining a debt consolidation loan without reading the fine print can get you in hotter water, leaving you with a bigger debt for a longer period of time costing you even more money than you did before you started.

Is there support available for me?

The best debt consolidation companies provide valuable advice and counseling, and those who need debt assistance can expect to get these without judgment from the professionals whose purpose is to help them through their tough financial situation.