How Does Debt Consolidation Actually Work

Without a doubt you have heard of ‘Debt Consolidation” plans, during these slowing economic times a debt consolidation loan might seem like the perfect fit for your household budget. In this article, we will evaluate some of the options for debt consolidation, and how to decide if you are a candidate for this financial option.

Debt Consolidation vs. Debt Solutions

Debt consolidation in the form of a loan is the best choice for your situation if:

1. You have high interest credit cards and
2. Not behind on your payments
3. You have an auto loan with payments still owing
4. You have equity in your home you can leverage

Debt Solutions on the other hand is working directly with your creditors to negotiate a deal with your credit issuers, this is a good option for you if:

1. You have high interest rate credit cards and
2. You are behind on your payments
3. You have other loans that are behind or very close
4. You don’t own a home or have no equity

How Each Option Works

Each option for debt consolidations have both pro’s and cons. First, debt consolidation in the form of a loan is just that, a loan. If you don’t have the credit or the income resources to repay the loan than this option is a risky choice. If you have the credit and the means to pay it back, obtain a loan either a personal loan or a home equity loan and pay off your debts immediately, you are than left with one payment and have consolidated your debts. However, with the credit crunch and mortgage companies refusing loans this option might not be available to you.

Debt solutions, whether on your own or with a debt solutions company to assist you may be your only option to consolidate your debt and move forward to financial freedom. Either you or the company you hire contacts your creditors, negotiating a lower payment for each debt and then bills you monthly for one lump sum to cover your entire creditor bills, including their fees.
Or if you have the time you can contact your creditors directly and negotiate on your own, to lower interest rates or request extensions of credit until you can re-establish your credit worthiness with that organization. This debt solution is an ongoing process and you must stay on top of all deals agreed upon by both you and the creditor and more importantly get everything in writing.

How to Choose What is Best for You?

First gather up all your monthly bills including any monthly expenses that you aren’t billed for such as food, groceries or other living essentials. Next evaluate your income to debt ratio and for realistic sake, deduct an additional 10% off liabilities.

Take note of items you could remove from your monthly output of money. Review your current budget or design a new budget for your family. If your budget is right on target and there are no more options to cut monthly costs than your option is either debt consolidation and/or debt solutions.

Check your credit rating, home equity options and the possibility of getting a signature loan. When choosing a consolidation loan be sure to set the payment at something you are sure will fit into your budget, and is less than you are currently spending. If this is an option for you than a debt consolidation loan is the perfect choice for you.

If after reviewing your budget and income resources and are still unable to keep up on your monthly obligations than debt solutions is a valuable resource for you. You can contact companies online or via the telephone, some charge a nominal fee and others offer their services for free. Be sure to research whatever company you decide to go with by using the Better Business Bureau in your area and the area that organization is listed in.