What is Debt Consolidation?

Debt consolidation or bill consolidation is a debt management method that involves combining all unsecured debts, such as credit cards, medical bills and insurance, and tuition bills, into one, fixed monthly payment.

If you are in deep debt, and having trouble paying your bills, you may be able to lower your monthly payment, or decrease the amount of interest you are paying, by consolidating your debt.

Taking out an unsecured loan with a lower interest rate for paying off existing debt is a common way to consolidate debt. However, if you have less than perfect credit rating chances are you can only get a secured loan with a house as collateral.

Debt Consolidation Options

Depending on your financial situation you have a few options to consolidate your debt: a bank loan, a home equity loan, or a credit counseling service. If you own a home and have equity in it, you may be able to consolidate your debt through a home equity line of credit. Alternatively, you may also get a bank consolidation loan to pay of all of your creditors.

Using a secured, home equity loan you can consolidate all of your unsecured debt into one single payment. Unlike other solutions, your credit score is not permanently affected because the lender gets the assurance of your loan repayment. As the loan runs for a fixed period, you can repay it in a shorter period of time with principal reduction in every repayment.

A credit counseling firm can help you deal with your creditors if you enroll in their debt management program. They will help pay your bills -- you send them one monthly payment, and they distribute the payments to your creditors. They can also counsel you on credit management, which debt programs to go for, when to take a loan and what repayment structure to follow.

If you're a good negotiator, you can consolidate on your own by applying a bank loan that offers a lower interest rate than your debt's rate. With the loan in hand you can then call all of your creditors to remove some charges and fees, or even interests, if you are going to pay off their bill in one lump sum. Once you reach an agreement with them, you can send out all of the payments to your creditors.

Some Concerns of Debt Consolidation

In theory debt consolidation is a good option for paying down credit card debt because credit cards usually carry a higher interest rate than an unsecured bank loan. Even though the monthly payments are usually lower, over the long period of the loan you need to repay a significantly higher amount of debts.

If you have a bad credit history your lender might force you to take out a secured loan to get a lower interest rate. And if you have high interest debt balances any unethical lender can charge you with very high fees in the loan. It can happen when you are behind on your payments and must refinance to keep your house.

A debt consolidation loan may also have a negative effect on your credit because more loans do not look good on your credit report -- especially if you're not making on time payments on your bills.

Also, choosing a credit counseling service can be difficult. Some companies will be able to do a good job than others in negotiating settlement with your creditors without having any effect on your credit score. But others companies might use settlement practices that can ruin your credit rating.

Is Debt Consolidation for You?

Credit consolidation is not always the right choice for every person. If you are finding it difficult to pay off your monthly bills credit consolidation offers a way to get your finances under control. By consolidating debts you can easily make on-time payments and as a result reduce late fees and extra charges.

However, if a substantial portion of your income goes toward paying interest and you need to incur more debts to meet routine expenses any additional loan will further increase your debts and inflate your interest payments. In this situation credit consolidation might actually put you into a worse position.

A consolidation loan or a debt management plan can help you pay off all of your creditors. However, if you find it difficult to manage your money then you will need a credit counselor that can teach you how to manage your finances, otherwise debt consolidation will only treat the symptoms of your debt problem. So, learn about all of your options before you choose your best debt relief option.

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Debt Consolidation