America Debt Consolidation

Basics of Debt Consolidation

Debt consolidation is the debt reduction process or system in which a debt-counseling agency negotiates with a creditor to combine your multiple unsecured debts into a single affordable monthly payment. Rather than sending your payments to five or six different utility or credit card companies, for example, you would only need to send one payment to a debt consolidation company, which would then dole out payments to the individual creditors for you. By consolidating your debts, you can lower your interest rates by up to 50% and/or distribute your payments over an extended period of time, if you wish. Secured loans such as car and mortgage loans are not eligible for consolidation.

Debt counseling services have been available for more than 40 years. Debt consolidation with the aid of a debt counselor is rapidly becoming the solution of choice when it comes to tackling debt and preventing bankruptcy. Consolidating your debt is not only beneficial to you, but to your creditors as well. A counseling service will help you, the consumer, by negotiating repayment terms that work for you, while enabling the creditor to set up a realistic payment schedule that will ensure repayment, thereby sparing the creditor from having to hire a collection agency.

If you are considering debt consolidation, you should make an educated decision when it comes to choosing a company. Do some research and find out which company offers the types of plans that are most suitable to your situation. Contact a handful of companies and ask about their fees, deposit requirements, interest rates, and payment schedules. Do the math and make sure that the plan you’re considering saves you money in the long run.

Despite the common misconception, debt consolidation is not the same thing as a debt consolidation loan; the two shouldn’t be confused. Most standard debt consolidation programs don’t require that the consumer take out a loan. Instead they allow the consumer to lower their interest rates on their unsecured debts so they can pay off their debts without having to borrow money or cause additional damage to their credit standing.

A debt consolidation loan involves borrowing money and using it toward credit card payments or the repayment of other unsecured consumer loans. However, if the interest rates are too high on a debt consolidation loan or the consolidation company charges too large a commission, this can prevent you from being able to pay off the loan. Debt consolidation companies that demand high fees or claim they can make unrealistic debt reductions present a risk not worth taking. Non-profit debt consolidation companies won’t charge you upfront fees but they may make you adhere to a budget and let them manage your finances for you.

If possible, establish a fixed interest rate so your payments don’t vary, and find out what sort of fees you’ll be obligated to pay before you sign for the loan.

Also, you must of course make sure that the monthly payments you’ll be making are smaller than the total of those you were making directly to your creditors. While reducing your monthly payments may seem ideal, extending the length of time during which you make your payments—for instance, from 4 years to six years—can result in you paying 1/3 more than your total debt, which is contrary to the objective of debt elimination.

If you are planning to participate in a debit consolidation program and are worried about your credit standing, choose a debt counseling service that specializes in limiting any damage your credit rating may incur as a result of your debt consolidation. Minimizing the damage to your credit report require closing credit accounts properly before the consolidation program starts. This process should only include accounts that are willing to offer a lower interest rate through consolidation. An agency that specializes in limiting damage to your credit standing will also ensure that all required paper work and proposals are submitted and followed up on efficiently. A conscientious agency will also make sure that all due dates on charges are changed according to the consolidation agreement.

You may be wondering why you should consider paying fees to a consolidation service when you can just negotiate your own debts for free. The fact is, when a debtor tries to negotiate with creditors on his own, they are highly unlikely to strike a better deal than a professional negotiator would. Unless you have great people skills AND are highly knowledgeable about finances, you could accidentally make matters worse, by withholding or forgetting to provide information that the creditor is bound to find out sooner or later. This blow to your credibility may be reason enough for the creditor to refuse reduction of your debt or settlement on improved terms. Worst of all, if your attempt to negotiate on your own fails, and you later sign up with a professional debt consolidation company, the creditor may refuse to re-open your file for further negotiation.