Debt Consolidation FAQ

Debt consolidation is the most complicated form of modification. Consolidation involves closing multiple debts at once through strategies such as refinancing, prepayment and settlement. The result is one final, lump sum loan that covers all of the previous loans. While debt consolidation is a popular strategy to reduce the burden of debts for many borrowers, it is not always the best option across the board. 

How Does Debt Consolidation Work?

You will take one large loan in a consolidation process. This loan will be used to repay all of the debts you owe. Some will be repaid in full, and others in part. The debt consolidation company you work with may help you settle your debts. If you elect to go through the process without the help of an agent, you will have to speak to lenders directly to close all of your existing loans. Since consolidation is a way to streamline your finances and reduce the burden of repaying multiple debts at once, it is most often used by borrowers with many forms of loans who feel overwhelmed by existing debt burden.

Does Debt Consolidation Always Result in Savings?

Debt consolidation does not always save money. The new loan you take will have an interest rate. This rate will ideally be lower than the average interest rate you paid on all of your previous debts. However, some borrowers try to reduce their monthly payment instead of focusing on their interest rate. This is particularly helpful if you feel you face default with your current monthly payments. Electing a low monthly payment consolidation loan, however, can lengthen the loan terms of your new debt. You will likely end up paying more in interest than if you simply allowed your loans to mature on schedule.

Which Debt Consolidation Company is Best?

Many borrowers make the mistake of thinking all debt consolidation companies will have their best interest in mind. Most debt consolidation companies are looking to turn a profit like all other lenders, and these companies will be motivated to get the best terms for them instead of for you. Working with a non profit debt consolidation company can help resolve this problem. You may also consider companies that charge a percentage of the amount they save you instead of an upfront or flat fee. This will provide the company with greater motivation to reduce your total debt burden.

What are the Alternatives to Debt Consolidation?

If your debts are getting out of hand, you do not have to consolidate. In fact, there are a number of viable options to solve your crisis. You can try modifying directly with a lender. This is a great option if you have lost your job or suffered a financial emergency as lenders tend to be more considerate of these circumstances than others. Borrowers who qualify for bankruptcy may try to avoid filing by using consolidation instead. This can be an excellent solution, but it can also leave a borrower in an even more desperate situation if the borrower cannot afford the new loan. If you qualify for bankruptcy, it is worth considering the option instead of going straight to debt consolidation.