How Debt Consolidation Works: Read On

May 16, 2012 by  Filed under: Debt 

Being over your head in debt can be frightening, stressful, and frustrating. Unfortunately, many American’s face the adversity of debt on a daily basis. As debt begins to pile up and you take loans from more than one source, it can become almost too much to handle. At this point, it might be time to consider debt consolidation.

Debt consolidation is the process of taking all of your bills from multiple sources and combining them into one bill, so that you only have one payment to make and keep track of each month instead of several.

Here’s how it works: the lender you choose to take out a debt consolidation loan with will work with the other sources of your bills, buying out your debt so that they can present you the balance in one lump sum of money. In some cases, this can take a load of stress off a person’s shoulders.

The trouble with having debts farmed out to multiple places is trying to keep up with payments and due dates. It can be easy to miss a payment because you’re trying to focus on another bill, or dates can fall at inopportune times between paychecks.

As bills pile up, they can severely and negatively affect your credit score. Your credit score is a reflection of how well you handle credit that is given to you. Late payments, missed payments, and things of this nature reflect poorly on your ability to handle credit. This in turn can make it difficult to do almost anything, such as finance a car or a house.

Instead of hassling with a low score, debt consolidation, as mentioned above, breaks down your existing debt into one simple payment. However, this isn’t a cure-all for debt, only one potential solution toward helping you claw your way out of it. The problem is that debt consolidation still involves a loan. And this loan comes at a cost.

With a debt consolidation loan, you end up paying for the convenience of having only one bill. This is because when your lender buys up your debt, he has to turn around and offer you the loan at a higher interest rate in most cases. This is standard procedure for most banks and lending institutions as it is, to safeguard themselves against faulty loanees.

If you have a poor credit rating, there’s a fair chance that you’re going to incur a much higher interest rate. In this case, it’s usually a better option to try to manage your debts on your own. Debt consolidation should only be considered as a last-ditch effort if all else has failed you and you’ve been left with no other options, especially if you’re facing bankruptcy or foreclosure.

I’m a wealth management professional specializing in debt consolidations. You may also be interested in reading more information about debt consolidation.

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