Better Credit Network
What is The Definition of Debt Consolidation
Debt consolidation is a term that is used to mean slightly different things, and it is worth being clear about what the process involves before you consider using this process to deal with debt problems. There is a general definition of debt consolidation that involves the process of moving from lots of individual debts to having one single payment that you make instead. As well as being easier to manage, this payment should also be less than the sum of your old debts, so your monthly outgoings are lower.
The difference comes when you look at how you achieve this consolidation. There are two main ways to do this, one of which involves borrowing money to pay off all your old debts, and the other involves setting up a payment plan to repay your debts at lower rates through a third party. These third parties will need to be reputable debt management companies. I will look at these two options in turn to help you decide which may be more suited to your situation.
The difference comes when you look at how you achieve this consolidation. There are two main ways to do this, one of which involves borrowing money to pay off all your old debts, and the other involves setting up a payment plan to repay your debts at lower rates through a third party. These third parties will need to be reputable debt management companies. I will look at these two options in turn to help you decide which may be more suited to your situation.
Definition of Debt Consolidation - Using A Loan
Using a loan to consolidate debts can be a risky business. As a general rule, borrowing more money is not often the best way to tackle debt. When you think about it, the logical thing to do is to reduce your debt, not increase it or just transfer it to somewhere else. However, there are some circumstances when taking out a debt consolidation loan can be the most appropriate form of debt help.
The danger with debt consolidation through a loan is that it can feel like you are better off, but you end up paying much more in the long run. This is because a lender might offer you a loan with a lower monthly payment amount, but you may have to keep on paying that amount for much longer than you would with your old debts. You need to look carefully at what it would cost you to repay your debts as they are now, and compare that with what it is going to cost you to repay the consolidation loan by the time you have finished paying it.
The danger with debt consolidation through a loan is that it can feel like you are better off, but you end up paying much more in the long run. This is because a lender might offer you a loan with a lower monthly payment amount, but you may have to keep on paying that amount for much longer than you would with your old debts. You need to look carefully at what it would cost you to repay your debts as they are now, and compare that with what it is going to cost you to repay the consolidation loan by the time you have finished paying it.
The times when a loan can be a good way to consolidate debt are when your existing debts are at very high rates of interest (such as with payday loans), or when interest rates have dropped since you incurred your debts. In these situations it may well be possible to find a new loan that will cost you less to repay than the debts you have.
Definition of Debt Consolidation - Using Debt Management Plans
The other way to consolidate debt is to use the services of a debt management company to set up a payment plan for you. This is where they approach all your creditors to seek their agreement to better terms for the repayment of your debts, which make it possible for you to pay out less each month. This usually involves getting reductions in interest rates, extra charges, etc.
When their negotiations are complete, you will make one monthly payment to the debt management company instead of paying any of your creditors. As well as the simplicity and the financial benefit, many people greatly appreciate the relief from having to deal with creditors chasing them for money all the time.
To be eligible for a debt management plan, you will usually need quite a bit of unsecured debt, to a few different creditors. Unsecured debts are things like credit cards, personal loans, etc. You cannot include secured debts like mortgages. You should always be careful to choose reputable debt management companies, and apply to a few different ones to compare what they can offer you.
When their negotiations are complete, you will make one monthly payment to the debt management company instead of paying any of your creditors. As well as the simplicity and the financial benefit, many people greatly appreciate the relief from having to deal with creditors chasing them for money all the time.
To be eligible for a debt management plan, you will usually need quite a bit of unsecured debt, to a few different creditors. Unsecured debts are things like credit cards, personal loans, etc. You cannot include secured debts like mortgages. You should always be careful to choose reputable debt management companies, and apply to a few different ones to compare what they can offer you.
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