Finance Roll

Debt consolidation means combining all your several debts, usually unsecured debts into just one account resulting in one payment each month instead of several payments. This goes to the debt Consolidation Company who will disburse it among your creditors.

The debt Consolidation Company's goal is to reach an agreement with your creditors in your behalf so the interest rates or any other late fees can be reduced or scrapped altogether, resulting in lower monthly payments. If your funds are very limited, your creditors may even agree to reduce the principal to an amount you can afford to pay.

The purpose of a debt consolidation company is to work out a program that will benefit both you and your creditors. Your creditors naturally want to see their money paid back and you want to be relieved of your debts in the most painless way possible. Of course, you can negotiate with your creditors yourself but creditors are generally more receptive to negotiating with professionals who are more likely to consider all angles of the situation.

The extent by which the interest rate or the principal amount of your debt is reduced is dependent on your capacity to pay. Before any agreement can be reached, your income and expenses are assessed by the debt Consolidation Company. The result of this assessment is submitted to your creditors as proof. This will become the basis for the terms of agreement.

A debt consolidation program will allow you to pay off your debts in a shorter period, say 4-6 years instead of 10 years, depending on how big your debt is. Another benefit is that your creditors will stop harassing you with telephone calls or letters demanding repayment for your debts. This will take some stress of you and will let you focus.

Common unsecured debts allowed in a debt consolidation program:

o Credit card debt - unpaid credit card balances

o Department store debt - unpaid balance on department store credit cards.

o Student loans - unpaid balance on loans used in pursuing college education.

o Tax debt - arrears on income taxes

o Medical or legal bills - unpaid balance incurred for medical or legal services.

o Personal loans - unpaid balance on personal bank loans or any other financial institutions

o Utility bills - unpaid bills from utility companies such as cable, telephone, gas, heating, electrical or home insurance services.

o Collection agencies - unpaid debt on bills that have been referred to a collection agency for repayment.

Choosing the right debt consolidation firm is important. Consolidating your debts will cost you money so find out what the fees are, whether you afford it with your current financial situation and any hidden or additional fees. Find out as much as you can so you do not end up with a dishonest company who does not have your best interest in mind.

When you enter a debt consolidation program, there are several conditions you have to adhere to, namely: to give the complete monthly payment on time every time until your debts are settled and to stop using your credit card or acquiring more debts.

Benefits of debt consolidation

o Lower monthly payments - this lessens the time you are required to pay your debt and ensure that you will be able to meet daily living expenses and still save for emergencies.

o Accrued interest on loans are reduced or eliminated altogether. For example, if you have been defaulting on paying a $2000 loan for a long time and your accrued interest and late fees amount to $1500, the Consolidation Company can negotiate for the interest and late charges to be written off so you only owe $2000. Therefore, you will be able to pay your debt easily and in a shorter timeframe, accelerating your debt-free life.

o Only one monthly payment. You only need to remember one payment date reducing the probability that you will miss paying it.

o Improve credit - unpaid or late payments can reflect badly on your credit report and lower your credit score. Once you start paying, your credit will gradually improve. After your debts are paid in full, it is possible to get your credit account reported in your favor.

o Avoid harassing telephone calls from creditors - your creditors will subsequently deal with the Consolidation Company instead of you.

o Budget tips - your new repayment plan generally includes budgeting tips to help you save for emergencies, in effect there will be no need for you to borrow money again and you can start building your finances again.

Debt consolidation is often confused with debt consolidation loan. The difference is that debt consolidation means rolling multiple debts into one resulting in a single monthly payment while debt consolidation loan means taking out a loan, usually secured on any valuable assets you may have, such as your home, to cover all your current debts.