How Does Debt Consolidation Work?

How does debt consolidation work you ask? Is it something you should consider to help you get out of debt? Let's have a look.

The first thing you should know is that the term "debt consolidation" is in itself, somewhat misleading (or at the very least "confusing"). Would it not be logical to assume that debt consolidation is the act of consolidating your debts? You would think so wouldn't you. But in fact, that is not always what is involved.

In my article "Debt Consolidation: A Tale Of Two Options" I take you through a detailed explanation of the two very different meanings of the term as it is used today. Understanding the differences is critical if you are considering consolidation as a debt relief option.

Having said that, 9 times out of 10 a company offering "debt consolidation" will not be offering a new loan to pay-off and "consolidate" your existing debts. Rather, they will be offering a service whereby they will be consolidating your debt payments into one single payment. But that is just part of it. A debt consolidation program can also help with the following...

  • reducing the interest rates on your outstanding debt
  • reducing or eliminating late fees
  • reducing or eliminating penalties
  • reducing your monthly debt payments to better fit your budget
  • relieving the stress of dealing directly with your creditors
  • teach you money management and budgeting skills and most importantly...
  • helping you become debt free in 3-5 years

How Debt Consolidation Does Not Work

  • it does not reduce the amount of debt you owe
  • it does not work for secured debts and some types of unsecured debts (like student loans). These debts cannot be included in a debt consolidation program.

Now that we have answered the question "how does debt consolidation work?" and looked at "how debt consolidation does not work", let's try and answer an even more important question. Will it work for you, and how much time and money can you save on a debt consolidation program?

Unfortunately, to answer these two questions, I would require some information about your financial situation, starting with a list of your debts and your income streams. The best way to get these questions answered would be to speak to a credit counseling/debt consolidation company. They will take a look at your debt situation, offer some advice and give you an estimate of what you could save by using a debt consolidation program. Reputable companies will offer this for free with no further obligation on your part.

Where can you find these companies? The best way is to search online where you can find counselors that work right within your neighborhood (if you prefer to meet with someone face to face), or find other companies that offer full service online counseling if that is more convenient for you.

I hope that answers the question "how does debt consolidation work?". Feel free to poke around the site and learn as much as you can about getting out of debt. Remember, informing and educating yourself is the first step on your debt freedom journey.


 
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Step 1: A debt consultant will contact you over the phone for a free counseling session. She'll review your financial situation and suggest the right solution to your debt problems.

Step 2: Upon being qualified for and starting a program, a licensed firm or attorney will start contacting your creditors. The purpose here is to reduce your outstanding debt amount or lower interest rates and eliminate late fees/penalty charges.

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