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Debt Consolidation

Debt Consolidation simply means that a person adds up all credit card bills, medical bills, and/or personal loans that are owed, and takes out one loan to cover all of those. The person is then left with one monthly payment, rather than several.

Automobile loans, home loans, and other “big ticket” debts can sometimes be included in a debt consolidation loan. However, individual states and loan corporations have different rules, so some places may not allow those debts to be included.

Debt consolidation can be a good thing, especially if the individual seeking debt relief goes through a REPUTABLE debt consolidation service, or through a financial institution (again, REPUTABLE) that offers such loans. The payoff rate (the EXACT amount of money it would take to pay a loan off on a PARTICULAR day) is usually smaller than the loan balance that is shown on a statement.

Additionally, some creditors may even reduce or even eliminate some or all of the interest or finance charges once they learn that full payment is forthcoming. When (or if) this occurs, this allows the individual seeking the debt consolidation loan to be able to borrow less money than what was originally anticipated.

Many debt consolidation services or places offering debt consolidation loans will work directly with the creditors. The individual applying for debt relief in this way provides the name of the creditor, the account number, the current account balance, and any other pertinent information. The loan officer or debt consolidation specialist then contacts the creditors, and works with them to reach an agreement on a payoff amount.

Once the exact payoff amounts are known, most debt consolidation services then set up an “automatic withdrawal” plan, whereby the amount owed to the debt consolidation service is automatically deducted from the borrower’s bank account on a certain day each month. This arrangement actually serves a dual purpose.

The first is that the borrower does not have to remember to write the check and send it to the appropriate place every month. The only thing the borrower has to do is make sure the money is in the account when the withdrawal date rolls around. This is usually not a problem, as most people are aware of when they will be paid, and can ask that the payment be withdrawn on or just after a particular pay period.

Another purpose that automatic withdrawal serves is the fact that the borrower never actually sees the “loan check”. In this way, there is no chance that the borrower will decide or be tempted to use the money that is intended for debt consolidation for anything else.

Even though an individual may be paying the same amount to one creditor (although, again, it may be less than the original single monthly payments, due to payoff balances generally being lower) than was being paid to several creditors), an individual may still very well find that stress levels have been greatly reduced. For all intents and purposes, the individual debts have technically been “paid off”, and the individual actually only has one loan that payments are being made on.

Once a debt consolidation agreement has been entered into, the important thing is that the individual strive to keep the situation(s) that led up to this from occurring again. Just because a lot of little debts have been turned into one larger debt does not mean that other little debts can be incurred again. Debt relief through consolidation proceedings should be considered a learning experience, not a license to start a spending cycle all over again.

Read More:

• Debt Consolidation is a Good Method of Getting Your Finances Back on Track