Debt Consolidation

Debt consolidation, in brief, means taking all of your current debts and compacting them into one loan with one payment.

Two Types

There are at least two ways to proceed with a debt consolidation loan. The first involves an intermediary, a debt consolidation company, broker, or advocate. This advisor or counselor negotiates with your creditors (like credit card companies, mortgage holder, car loan bank, etc.) and tries to reduce the amount you will owe them each month.

They may accomplish this by getting a lower interest rate, convincing them to reduce the amount of the loan, or lengthening out the term of the loan.

You then make a single payment to the loan consolidation broker, and the broker makes the loan payments for you to each of your creditors.

You, the borrower, undertakes the second type of consolidation loan. In this type of consolidation, you take out one big loan (often a home equity loan or a business loan, but it may be a signature loan) and pay off all of your smaller loans with the money you get by taking out the large loan.

This means that all but one of your creditors is paid off, and in some cases you are able to find a lower interest rate on the single large loan than on many loans such as credit card loans.

Potential Hazards

If you are in debt over your head, these debt consolidation solutions may sound tempting. But be sure to read the fine print and beware before you sign any kind of agreement. There are many examples of people who have gone to a debt consolidation arrangement in hopes of pulling things together, and instead it only hastens their financial demise.

High Interest Rates

The fact that you are in credit trouble should alert you to the fact that these debt consolidation loans are still loans, and underwriters still demand that borrowers be good credit risks before they loan.

If you have credit problems, you won’t be considered a good credit risk, and may actually end up with a higher interest rate than you were paying originally. Make sure you understand all the details of an arrangement before you agree to it.

BrokenPromises

The “one EZ payment” that debt consolidation experts advertise may or may not be going to your creditors. Many of these companies take their own fee – up to 10 percent of your payment — as their own fee.