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What Is The Definition Of Debt Consolidation
See Also The List Of The Most
Reputable Debt Consolidation Companies
(US and UK)
Read More About How Debt Management Can Help You
Debt consolidation is a very widely used expression, but it is not always used accurately or to mean the same thing. The end result of the process of debt consolidation is always that you only have to make one monthly payment instead of remembering lots of individual payments to different creditors. How you arrive at that situation is achievable in two quite different ways. I will look at each of these in turn and explain the pros and cons.
What Is The Definition Of Debt Consolidation:
Consolidation Through Loans
In the UK in particular, the term debt consolidation is often assumed to mean consolidation through a loan, though it is also widely used in that sense in the US too. The idea is that you take out one large new loan and use it to pay off all your existing debts. This clears all your debts, leaving only one big one to think about.
The things that attract people to this option are the simplicity of a single payment and the promise of a monthly payment that is less than you currently pay for your combined debts. On the face of it, it seems like you are saving money because you have less to pay out each month, but you need to look a little deeper to understand what is really going on.
When a loan company promises that your monthly payments will be a lot less than you were paying for all your old debts, the usual reason is that you will be paying off your new loan over a much longer period. Even though you pay a bit less each month, the fact that you go on paying that amount far beyond when your original debts would have been paid off, means that the process actually costs you far more in the long run.
Borrowing money is usually not the best answer to solving a debt problem and debt consolidation loans are far more likely to just reduce your monthly outgoings than genuinely save you money in the long run. It is possible to use a loan to genuinely reduce your debt, but only in certain very particular circumstances. If your debts are at an especially high rate of interest, it may be possible to find a new loan at a significantly lower rate of interest. This is particularly likely if interest rates have dropped since you took on your original debts.
You need to be methodical and strict about how you decide what to include in a consolidation loan. You must know exactly what rate of interest you are paying on each of your debts, and only consolidate those which are at a higher rate than the new loan you are considering.
For more information on debt consolidation loans and a list of recommended lenders, visit the main Debt Consolidation page of this website.
What Is The Definition Of Debt Consolidation:
Consolidation Through Debt Management Plans
The other definition of debt consolidation is when you consolidate your debts into a debt management plan. The term debt consolidation is often used to mean the setting up of a debt management plan, particularly in the US. Once again, the result is that you make only one monthly payment instead of lots of individual ones, but this time there is no new loan involved.
Setting up a debt management plan involves using a debt management company to negotiate with your creditors to change the terms of how they get their money back. This involves amending the terms of your repayments to include reductions in interest rates and often writing off additional charges and penalty payments.
The debt company will renegotiate your debt repayment terms and then deal directly with your creditors on your behalf, so that you no longer need to. All you do is make one affordable monthly payment to the debt company, and they in turn make payments to all of your creditors.
Form most debt situations a debt management plan is likely to make more sense than taking out a loan. A good company will often also provide additional free help for people who sign up for a plan. This can include counselling and training on how to reduce spending and budget properly, to ensure you do not get into debt again.
What Is The Definition Of Debt Consolidation:
Who Should Consolidate Their Debts?
Taking out a loan to consolidate your debts will depend entirely on your credit rating and the lender you are approaching. Debt management plans, however, are designed for quite particular situations, and you will not be offered a plan unless your situation is appropriate. It is therefore important to understand whether you are likely to qualify for a plan or not.
Debt management plans can only be used for unsecured debts, which are the most usual forms of consumer debt, such as credit cards, personal loans and overdrafts. You also need to have quite a large amount of debt to a few different creditors in order for it to be viable. The other important requirement is that you have enough money spare each month to be able to afford a reasonable payment towards paying your debts.
What Is The Definition Of Debt Consolidation:
Choosing A Debt Company To Help You
If you decide that a debt management plan may be the best solution for your situation, the most important decision you have to make is which company to use to set up your plan. This should not be taken lightly as there are unfortunately some organisations who are far less concerned with helping you than they are with helping themselves to your money.
You can safeguard against this to some extent by applying to a few different companies and comparing what you are offered. But ideally you should take steps to only approach those companies that you already know to be reputable and effective.
You can find a list of the most reliable debt management companies on the main Debt Management page of this website.
Apply to two or three companies without any obligation and go with whichever you feel most comfortable with.
