How Does Debt Consolidation Work?

Debt consolidation is the process of taking out a singular loan to pay off many other debts. Consolidation is a component of debt management or debt counseling; performed to secure a lower interest rate.

Ultimately, the purpose of performing a debt consolidation is to acquire a fixed interest rate or for the ease of servicing only one loan.

Debt consolidation may involve converting several unsecured loans into one unsecured loan; but also involves taking a secured loan to pay certain outstanding debt, the collateral is most commonly a house. A common example of using a collateralized loan to consolidate outstanding debt would be a home equity line of credit or HELOC.

Doing Personal Debt Consolidation
Consumers with several forms of debt tackle their debt personally, independent of expert advice in two ways: consolidate unsecured debt onto one credit card or use collateralized debt. The following details the two popular methods of debt solution:

Credit Card Consolidation
Numerous balance transfer offers from credit card companies reach American households in the hopes that people will take advantage of a credit card debt consolidation at zero to low interest rates.

Consumers leverage these offers in hopes that consolidating high interest rate credit cards balances into one low interest rate will culminate into a lower debt payment and convenience of one bill.

Home Equity Lines of Credit
HELOCs are collateralized loans that enable a homeowner to pay for debts by writing one check. An equity line of credit is a loan in which the lender lends an amount, where the collateral is the borrower’s equity in his home.

Debt Consolidation Services
Many debt consolidation services are offered by non-profit firms, but they are not benign as people make them out to be. These companies make good monies by charging customers in various different ways. Certain nonprofits charge a percentage of the payments made to the debt service organizations. Some lenders take the initial one or two payments for administration costs, but this can lead the customer to become delinquent to his creditors.

Consolidation services are sold under the guise of benevolence with fees. For example, if you go to a non-profit for assistance, your first payment is considered a “voluntary contribution.” Additionally, the non-profit debt consolidation firm collects up to 10% or more of your “contribution” payments.

Even though by law all the fees must be disclosed to the client by the debt management service, non-disclosure is rampant in the industry. Also, the extra fees charged by these services may cause your credit to further deteriorate instead of improving due to unintended triggered late fees. Credit counseling is a money making enterprise in which your interests are secondary.

The Sure Fire to Get Out of Debt
Breaking the habit of getting into debt is key to staying out of debt. Remember having debt is not a positive attribute; leveraging debt doesn’t work, unless you are an extremely wealthy individual. But average Americans don’t go into debt because of leverage but mostly for pursuing consumerism. Change your habits and follow the above advice and you will have a sure fire way to get out of debt.