Debt Consolidation: How Does It Work?

Debt consolidation refers to multiple payments that are being compressed into a single and more affordable payment. Consolidation programs are intended for people who are having a hard time dealing with their debts with high interest rates. With a good debt consolidation payment plan, unsecured debts become easily manageable.


What Is Debt Consolidation?

Debt consolidation is basically a legal procedure in which an individual’s unsecured debts with high interest rates are consolidated with a more affordable monthly payment. The following are some of the debts that can be eliminated through debt consolidation: credit card bills, hospital bills, payday loans, unsecured loans, personal loan and utility bills.


Why Do People Need Debt Consolidation Services?

There are a number of reasons why people might want to consolidate their unsecured debts. First, they might not be capable of paying several bills simultaneously. Next is when they fail to repay their debts on time or they completely missed to pay their bills on the given time duration. Being short of cash could also be an apparent reason. Another is when they use their credit cards to pay their debts. Lastly, it could also be when they plan to take out a cash advance loan or a personal loan.


How Do Debt Consolidation Programs Help?

Debt consolidation programs are services provided by financing professional corporations, such as Moneylender that offers immediate solutions if an individual barely has the capability to pay multiple debts at the same time. The main purpose of debt consolidation programs is to reduce the overall debts by simply cutting down the interest rates. Here are the stages that are usually undertaken by people who plan to apply for debt consolidation services:

Financial Counseling:  Prior to the approval for the request to avail debt consolidation services, consolidators will have to check out an individual’s financial status. They will ask several questions that will help them understand the current financial situation of a person. Consolidators will calculate the total amount of unsecured debts carried out on a debtor’s shoulders. After finally getting an idea about the total outstanding debts, the consolidation companies usually ask their clients to attend counseling session. This way, the clients will have a better understanding what debt consolidation is all about. Aside from that, clients will be provided with helpful tips on how they can manage their finances well. This is also the best time for the debtors to consult their concerns with regards to the processes that they shall take.

Signing of the Written Agreement: After clearing out the queries and if the person feels a strong necessity to avail debt consolidation services, the next step will be the signing of the written agreement. Oftentimes, the debt consolidation companies do not necessarily initiate to send their clients the written agreements unless it was requested to them. It’s best for clients to read all the terms and conditions included in the agreement and clarify any doubts before finally signing the agreement.


Informing Creditors: It’s very important that clients inform their creditors that they have applied for a debt consolidation program. That way, creditors’ notifications will be redirected to the consolidation companies. When clients receive phone calls from their creditors, they may request them to contact their consolidators next time. On the other hand, it is also important to be aware that creditors are not obliged to comply with this request.


Going Through the Payment Plans: Debt consolidation companies prepare payment plans that are most likely suitable for the current financial situation of their clients. The payment plans will also be sent among the creditors of their clients. In the side of the company’s representative or the consultant, this task will certainly require excellent negotiation skills to persuade the creditors to decrease their clients’ interest rates and hopefully eliminate unpaid or late fees.


Making Up the Payments: Creditors will take a look at the payment proposal prepared by the debt consolidator. Once the creditors are convinced that the plan is favorable enough, they will immediately approve the plan. Sometimes, they shall ask for some revisions as well. Clients will never have to worry about making payments to each of their creditors since the debt consolidation companies will be the ones to send payments towards the creditors. All the unsecured debts are being narrowed down into more affordable payment bills so it s highly expected that clients must make up their payments on time.


Re-evaluation of the Financial Status: A person’s current financial status tends to fluctuate all the time. It may deteriorate at one point or it could also improve. If such thing happens, it is highly suggested among clients to update their debt consolidation companies about it. This will allow the debt consolidation consultant to modify the payment plans according to the current financial status of their clients.


Other Debt Relief Solutions Aside from Debt Consolidation

Although debt consolidation is the most efficient and the safest solution to one’s financial problems, there are also some other options that an individual with outstanding debts may opt to consider. Here are the other three debt relief solutions:

Debt Settlement: This option provides solution by overcoming debts through negotiations. It aims to reduce the payoff amount required by the creditors. This process also occurs in a debt consolidation program in which the consultant will try to convince creditors to agree with the proposed plan.

Debt Management: With this debt relief plan, a credit counseling or credit management company negotiates with the creditors not only to reduce the amount of the interest rates but as well as to come up with an alternative solution to repay the outstanding debts. This process is similar to one of the stages of debt consolidation in which consultants propose a payment plan that are most likely suitable to their clients’ current financial situation.

Bankruptcy: This might be the last resort in order to get out of debt. Bankruptcy can greatly damage one’s credit score by 200 to 250 points. Filing for bankruptcy needs through thinking and a person with such a terrible financial situation should consider other possible options. Through credit consolidation, an individual’s credit score is affected not in the sense that the credit score will eventually increase. What credit consolidation does is to create positive impression on the credit score.

Debt consolidation could absolutely be a good option to resolve financial problems. To fully take advantage over its benefits, it is strongly recommended among clients to understand how debt consolidation really works.

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