subject: What Are Debt Consolidation Services? [print this page] Debt consolidation services are companies that will help you restructure your debt and make your monthly payments more affordable. This article looks at who these services are for, what they can do for you, what to expect when going through the process, and whether they are an advisable option for those in financial difficulties.
Companies that offer these services can be found all over the Internet, as well as in newspapers, magazines and on television. They claim that they will help you lower your monthly repayments, reduce your interest rates, avoid bankruptcy and eventually become debt free.
It is important to realize that debt consolidation services should only be considered by people that are in serious financial difficulties, and do not earn enough to make even the minimum monthly repayments on their credit cards and loans etc. Those who are simply struggling with their budgeting should first consider other financial solutions, which will be detailed later in this article.
The way in which debt consolidation services work is that you pass the details of all of your debts onto a financial consultant. They will negotiate with your creditors to reduce your debts and the interest rates, and then provide you with a financial solution, often in the form of a loan to pay off all of your debt.
This loan will significantly reduce the amount that you pay every month, and instead of making several payments to different credit card and personal loan companies every month, you will just be required to make a single monthly payment to the debt consolidation company.
This sounds easy but there are several downsides. Although the amount of the monthly payment will be lower, the interest rate on these types of loans is typically high (above 20% APR), meaning the total amount you repay will likely be even greater than the amount you previously owed. This is because the debt consolidation company is charging you a fee for their services.
Debt consolidation is also a significant black mark on your credit report, and once you have taken this step you are unlikely to be accepted for any other credit products for a period of 5-7 years.
Before considering debt consolidation services you should look at the other financial options available. These include restructuring your monthly budget, applying for a regular bank loan or extending your mortgage to pay off the debt. Even increasing the amount you pay every month on your credit cards by just a few dollars can shave years of the total repayment time.
If you are in serious financial difficulties it is worth telephoning your credit providers and asking them if they can reduce your interest rates, rather than paying someone else to do it for you. If you eventually have to take the step of debt consolidation, speak first to a non-profit agency such as the National Foundation for Credit Counseling, for free and confidential advice.
