A lot of people are into consolidating their debts but what exactly is Debt Consolidation and why should you consider it? Debt Consolidation simply means putting together (or “consolidating/combining”) all your small debts into a single debt (or two large debts). And why would you do this?
The two main reasons why you should consolidate your debts are:
1) You can avoid the hassle of paying back several creditors, making your financial management a lot easier and
2) You get a reduction in the cost of all your debts’ interest fees.
How Consolidation of debts work
When you are consolidating your debts, you essentially present a debt consolidation plan to one or two of your existing creditors, or, approach a third party lender to consolidate all of your outstanding debts. Your will be able to settle your debts with all your other creditors, and you get the option of paying only one (or two) creditors. Thus, consolidating your debts works almost just like a loan but not exactly. You will be given a lending solution but only so as to consolidate all your existing debts. Your consolidation lender will ask you to declare the total amount of all your debts and you would need to account for it.
Two ways to consolidate your debts
The first way to consolidate your debts is through self-regulated consolidation. This means creating a debt consolidation plan all by yourself which would save you extra money. This would require you to personally approach one or two of your existing creditors, and convince them to take over all of your other small debts and consolidate it into a single account under them. They would settle your small debts and you would need to pay only them for doing this. This method though would require a lot of discipline on your part in managing your money in order to pay off the consolidated debt.
The second way to consolidate your debts is by paying a Debt Counseling Service to make a deal with all your creditors to consolidate all your debts into a single large debt under the service. You will then pay a monthly imbursement to the Debt Counseling, which would distribute it to your debtors as payment for all your debts. This way, you’re accountable only to one body, your Debt Counselor. The down-side to this method is that you pay a small commission to your counselor for consolidating and handling the payment of your debts.
In any of the debt consolidation methods above, the important thing is to be able to manage your finances effectively in order for you to pay off all your consolidated debt, whether you are paying only a single creditor or paying for the service of a debt counselor.
The author is a freelance writer who writes about emerging communication technologies.
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