Debt consolidation is usually mistaken with debt consolidation loan. A debt consolidation loan is different in the sense that you need to take on another loan, usually secured on your valuable assets such as your house, to cover all your existing debts.
Consolidating your debt means rolling all your debts into one. This option is available for individual or families that are unable to meet debt payments on several unsecured debts. Debt consolidation programs maybe run by a non-profit organization or a private company. They can help you select the best option suitable for your particular needs.
Unsecured Debts are typically smaller in amount than secured debts and have a higher interest rate. These debts are eligible for consolidation.
Examples of Unsecured Debts:
• Credit card debt
• Unpaid utility bills
• Automobile payments
• Medical and legal arrears
• Department store credit cards
• Arrears on income taxes
• Student loans
• Personal bank loans
Before a Debt Consolidation program can commence, you will need to provide information regarding your financial status. You also have to show proof of your employment. Your credit counselor will then assess your debt situation:
• To determine the total amount of your debt
• To determine from your budget how much you can comfortably pay each month.
Other services include:
• To help you set up an emergency fund for unexpected expenses so you can avoid getting further into debt.
• To give out budgeting and saving tips so you can start working on getting your finances in control.
Your credit counselor will then negotiate with your creditors:
• To arrange for a reduction in interest rates or waive late fees thereby lowering the amount of your monthly repayments and potentially saving you hundreds of dollars.
• To arrange for a reduction in the principal amount. This is dependent on your capacity to pay. Your creditors will need proof that you do not have the funds available before they will consider this.
• To pay your creditors in your behalf.
Advantages of Consolidating Debt
• One monthly repayment to the debt Consolidation Company who will in turn, distribute it among your creditors. This means you only need to remember one repayment date each month, lessening the probability that you will miss paying your dues.
• Lower interest rates and waived fees. This will give you extra money, which can go towards debt repayment or your emergency fund.
• Reduced amount of time needed for repayment.
• You can automate your payment by asking your bank to deduct it from your bank account.
• Speed up the process of getting you out of debt
• Avoid filing for bankruptcy
• You do not have to deal with your creditors directly
• Stop the constant telephone calls and letters from creditors demanding payments.
• Improve your credit score. Once you start paying, it will show on your credit report thereby improving your credit score.
Before signing up for a debt consolidation program, be aware of:
• All service fees involved. Ask for a complete information regarding fees you need to pay such as an up front fee upon signing the agreement or any hidden fees. Find out if it is a fixed rate or whether it is possible to negotiate it down to an amount you can afford.
• Whether you can transfer to another counselor if you are unsatisfied with their service.
Remember that once you enter a consolidation program, you should see it through until all your debts are paid. Otherwise your creditors may penalize you by canceling the program and you may have to revert to paying a high interest rate and other fees that have been previously waived.
If you do have several debts, and you have decided to consolidate it, then do it now. Do not start only when you think you are ready to face the problem. The longer you take to pay it off, the more interest will accumulate making your debt bigger. The sooner you do it, the sooner you can get yourself out of debt.
Keep your end of the bargain. In the end, it will benefit you more than your creditors. Help yourself. Avoid getting into any more debt during and after the consolidation program. Make use of the budgeting and saving tips your debt counselor have provided you. Be wise and start saving for tomorrow instead of suffering for yesterday’s failure.
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