How Does Debt Consolidation Work?

It sounds simple right? Debt consolidation is just grouping your debts into a single payment and having one creditor vs. several.

Yes, that is true but unfortunately it’s not always that simple as there are many ways to consolidate your debts.

  1. Refinance your home

Do you have a home that is worth more than the mortgage balance? If so and if you have good credit and income levels then you can consider the easiest route for debt consolidation. This is done by refinancing your home which will increase your mortgage balance but will leave you with cash to pay off all your debts.

Instead of having a lot of different creditors you will be left with a single mortgage payment every month. The best part about using a home refinance to consolidate debts is that the loan rates are typically very low especially compared to credit card rates.

  1. Hire a professional debt consolidation company

There are companies who help people get out of debt and consolidating your debts into a single payment is part of the process. These companies can be categorized under of two solutions:

  • Debt settlement (debt negotiation)– These companies will act on your behalf as negotiators with your creditors. They seek to get your balances owed reduced using their relationships they have with most major credit card companies (the primary type of debt they work with).
  • Credit counseling – These companies are allies of the credit card companies and seek to help you budget better and put you on a strict payment plan that seeks to help you pay off the full balance of your debts over a period of years.. To help you achieve this goal they are able to get the credit card companies to lower your interest rates and fees to manageable levels.
  1. Get an unsecured loan

Most people or banks will not lend you money to pay off your debts unless you have something they can secure the loan with like a home or other valuable asset. The asset provides the lender with something they can sell if you are unable to pay it back despite your best intentions. So unsecured loans are difficult to obtain however, a new type of unsecured loan marketplace has popped up online through various websites.

These websites facilitate what’s called peer to peer lending whereby people who can prove their creditworthiness may be able to get microloans from total strangers at rates that are less than credit cards.

If you are able to get enough people to participate in your loan then you can consolidate your debts by replacing the high interest credit card debt with the single peer to peer loan.

So as you can see “debt consolidation” is a general term and is part of the process of most debt solutions but itself is not a solution. Researching your options and understanding the benefits of drawbacks of each is the only way to determine what is best for you.

93 comments on “How Does Debt Consolidation Work?”

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