How Debt Consolidation Really Works

You have probably seen the ads on television and heard them on the radio. There are many debt consolidation outlets offering their services to people who feel as though they are drowning in debt. For some, these services can be a huge help in lowering your monthly payments and give you some breathing room, but you need to do your homework.

The way debt consolidation works is the company you choose to work with will contact all of your creditors and work out a monthly payment plan with them. In some cases, the creditor will lower the interest rate or agree to accept a lower payoff amount than what you actually owe. Once the consolidator has negotiated repayment plans, you make one monthly payment to the consolidator, and your debts get paid off.

In some cases, you will find that with lower interest rates and negotiated payoff figures, you end up paying less per month in one payment than you were previously paying out to all your different credit card companies and other creditors. Beware, however, that some consolidators charge large fees, so while your monthly outlay may be significantly reduced, you may end up paying more in the long run.

Another way to consolidate your debt is through a home equity loan. Borrowing money against your home allows you to make one monthly payment to your lender as opposed to many smaller payments to various credit card companies or other creditors. In most cases, the interest rate on a home equity loan will be much less than the high percentage credit card companies charge, and you may qualify for tax deductions.

Personal loans are a little more difficult to obtain, especially if you are carrying a large amount of debt, but you can usually find the interest rates will be lower than many credit card companies. Taking a personal loan to consolidate debt can help lower your monthly payment, allowing you to pay more towards your debt or freeing up some money for you to use towards other things.

Another option to consider in an effort to consolidate is to do a credit card transfer. This option requires you to open up another credit card account and transfer all of your smaller credit card balances to one card. Many credit card companies offer special deals to new card holders on balance transfers. You may get 6 months interest free or a significantly reduced interest rate to transfer all of your balances. This is a great way to lower your interest rate and your monthly payments, but it is a short term solution. The no or low interest offer is generally a limited time only offer, and when the introductory offer expires, you find yourself paying a much higher interest rate.

Always look at all of your options, and consult with various companies. Ask about all fees associated with debt consolidation and how the companies want them paid (most just roll them into your monthly payment). For many people, debt consolidation is the solution to an overwhelming debt problem.

Indebt.com provides debt advice and help.