What is Debt Consolidation?

Debt consolidation — it’s a buzz-phrase we often hear being bounded about these days. Though, what exactly is debt consolidation and why would you want to consider it? Simply put, debt consolidation is where you take a lot of your small debts and “consolidate” (put them all together) them into one or two large debts. Here is some basic information on debt consolidation.

How to Consolidate your Debts
In order to do this, you can either approach one of your existing creditors with a debt consolidation plan, or else you can talk with a third party lender about the possibility of taking out lending with them in order to consolidate your existing outstanding debt.

In this regard, it is very important to understand that “debt consolidation” is not new money lending. Any lending you are given is merely to consolidate the existing debt you have, and the lender will ask you to declare and account for this. So, although debt consolidation may be considered a “loan”, it is not a loan in its purest form.

Reasons to Consolidate Debt
The overall reasons why you may wish to consider debt consolidation are two-fold:

  • In order to try and reduce the cost of your existing debt funding.
  • In order to try and do away with all the mess of having to pay back lots of creditors and instead concentrate on one or two large creditors; thereby hopefully making your money management problems much more manageable.

As you can see then, given the right circumstances, debt consolidation can be an extremely useful debt management tool. However, if you are considering debt consolidation as a means of managing your existing outstanding debt, you should also note that there are two ways you can put in place an effective debt consolidation program: (1) by yourself; and (2) using a debt counseling service.

Should you Consolidate Debt by Yourself?
In short, debt consolidation programs undertaken by you are by far the cheapest form of working this useful debt management program. But, self-regulated debt consolidation programs do require a certain level of discipline. They do require you to arrange for one or two creditors to accept to take over your existing smaller debts.

They also require you to make payment to this creditor in a timely manner. In other words, there is no financial overlord looking over your spending and making sure you stick to a workable financial diet. For this reason many of us who consolidate our debt believe we have just been given a new lease of life and go out and spend, spend, spend. The net result of this is not only do we now have new debt to repay, but we also have the large consolidated debt to repay. As such, self-regulated debt consolidation may not be the most effective debt management tool.

Debt Counseling Services
Conversely, debt counseling services are where you tell a debt counselor what all your existing outstanding debt is. The debt counselor then either arranges with your existing debtors to negotiate with them going forward with regard to the outstanding debt, or arranges to consolidate all the outstanding debt as one large debt. You then pay the debt counselor a monthly payment, which they then either distributes to all of your existing creditors or pays towards the one large debt. For providing this service the debt counselor takes a commission, thereby making this form of debt consolidation more expensive, but at the same time probably more effective.

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One thought on “What is Debt Consolidation?”

  1. I’ve heard about debt consolidation before, so I appreciate your explanation about what it actually means. It seems like a complicate process to take on by yourself. I think your suggestion for getting help from a debt counselor would be the best choice for many people.

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