Debt consolidation is a phrase thrown around a lot lately. There are many companies out there advertising it, and for someone who’s in debt, it’s probably quite difficult to differentiate between the good ones and the bad ones. Here are a few things to help you in understanding how debt consolidation works.
First off, debt consolidation is bringing your individual debts under various creditors to one specific creditor who will pay off all the others and hold one loan that you make one regular payment on. Depending on how much debt you have, it can be very attractive to a lender to take on all of it instead of a small piece. Just like any other product, the more money they “sell” to you (in the form of a loan), the cheaper the “price” (interest rate). Because of this, many credit card companies and/or banks offer “debt consolidation” as just another way of giving you a loan, by telling you to pay off other higher-interest rate loans with their money.
If you understand that last paragraph, you’ll realize you can do a lot of debt consolidation all on your own, or with minimal assistance. Simply approach your current lenders individually, and see what rates and terms they would be willing to offer if they handled all of your debt instead of a small piece. A good financial advisor can be very helpful in showing you how to do this and helping you determine what offers make the most sense for your situation.
If you’re uncomfortable dealing with creditors and don’t have a financial advisor, you can use a debt consolidation service. The important thing to know here is that there are a number of not-for-profit services out there that can help you. Regardless of whether you use a non-profit or profit service, read the fine print of any agreements you sign regarding your debt, and check the service out with the Better Business Bureau! People have used bad debt consolidation services and sent them their monthly payments, only to find out later that the service did not pay off their creditors as promised.
One last thing to remember: If you’re having problems with your debt, chances are debt consolidation will only help in the short term. You need to carefully examine how this debt occurred in the first place, and make sure you are improving your situation that it cannot occur again. This is where a good financial advisor will come in very handy. It’s the different between getting a personal trainer or getting liposuction. Preventive maintenance is much cheaper (and safer) in the long run.
