Debt Consolidation Programs Can Rescue Borrowers From Financial Hot Water

June 21, 2012 by  Filed under: Debt 

It is often mentioned that escaping from the terrifying grip of debt is a life-time ambition, but one that is rarely realized. It seems that as soon as we leave college we are caught up in a never-ending spiral of bills, loans and credit cards, each of which simply worsens our financial woes. But through a debt consolidation program, the pressure can be alleviated.

The simple fact of the matter is that debt can be overcome, and those of us in serious financial hot water can escape. But managing debts effectively does take some effort, and by signing up to a program, there is a great chance of financial recovery.

However, as with everything to do with financing, it is important that some care is taken before signing up to a program offered by one of the many companies that specialize in debt consolidation, with some not being quite as genuine as they might seem.

What is Debt Consolidation?

The basic concept behind an effective debt consolidation program is that the debt that a person has accumulated will be bought out by the company and then repaid at a more affordable rate by the original borrower. It is effectively a debt transfer system, but can play a huge role in lightening the financial burden we find ourselves under.

For example, a person may have credit card, personal loan, auto loan and a variety of other debts amounting to $50,000. Because these loans are from different lenders, and have different interest rates applied to them, the overall cost can be significantly higher than it needs to be. But by managing debts effectively the cost is reduced.

So, instead of a combined monthly repayment cost of $1,500, through debt consolidation, it can be repaid at one interest rate over a longer period of time, thus reducing the repayment to perhaps $1,000. That leaves extra cash to use for other obligations.

The Long-Term Advantages

There is a clear advantage in signing up to a debt consolidation program in that a range of individual debts can be gathered into one, making it much more manageable. But there are more pluses to the equation.

Not least among them is the effect that this program has on the credit score of the borrower. In managing debts effectively, they need to be bought out. To the borrower, this means that the debt is transferred but, to the original lender, this means that the debt is cleared. With each cleared debt, the credit score of the borrower is adjusted, thereby improving the credit rating overall.

The result of this is that the terms of any future loans will be better, interest rates lower and loan limit set higher. However, as always, there are certain things that should be watched out for when turning to debt consolidation.

What to Watch Out For

The majority of companies offering debt consolidation programs are on the Internet. This in itself has pros and cons, with the chief pro being an accessibility that it hard to match. However, the cons include the risk of unscrupulous operators taking advantage of consumers.

To avail of the program, it is necessary to sign a contract, but the terms of any contract need to be examined before it is signed. For example, the company may apply extra fees and charges, and charge heavy fines to any borrower who fails to make payments to them on time. In managing debts effectively then, there can be risks.

However, check the firm with the Better Business Bureau for information, and read the small print on contracts carefully. Then, only sign the debt consolidation agreement if fully satisfied everything is alright.

Sarah Dinkins is a financial advisor who writes about Guaranteed Unsecured Credit Cards and 100% Guaranteed Bad Credit Loans

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