What is debt consolidation?

Feb 27, 2017 |

Debt consolidation is the process of merging two or more debts (credit cards, personal loans, medical bills, etc.) into one bill or a single loan. Correspondingly, only a single monthly payment would have to be paid until the debt has been completely settled. Debt consolidation helps eliminate problems that result in penalties such as late payments and incorrect amounts. Because there are fewer bills to worry about, there are fewer chances of getting confused about the amounts to be paid and when they are due. It is not a band-aid solution but is instead a long-term plan that can help make debt payment more manageable.


Benefits of Debt Consolidation

Debt payment can be overwhelming and the need to monitor different amounts with different due dates can add to the stress. Aside from helping avoid mix-ups and memory lapses resulting from having too many bills to pay, debt consolidation has other advantages if the right plan is chosen and kept up with properly. It can also lower interest rates, allowing one to save more money or even live more comfortably. A debt consolidation plan may have the option to give you lower and more manageable monthly payments. If payments are properly settled regularly, they can help get rid of debts faster. It can also help you protect your credit score and avoid bankruptcy, which will otherwise damage your financial future. Moreover, a qualified professional can do more than just provide you the convenience of having an expert monitor and simplify your debt payment. The advice you learn from talking to an expert can help you manage your finances better, perhaps help you avoid or minimize debt in the future.


Types of Debt Consolidation

You may choose to consolidate debt either through Debt Management Plans (DMP) or through a Debt Consolidation Loan (DCL). Most financial experts prefer DMPs and the most recommended are those run by non-profit organizations. A DMP will often start with a counselling session to help determine the amount of money that you can afford to pay your creditors each month. They can also help you get a lower interest rate for your debts and reduce or even waive late fees to lessen the amount you have to pay. The agency running your DMP will then receive your consolidated monthly payment and split it among your creditors. A Debt Consolidation Loan, however, involves combing multiple loans to become a single new loan. It is best to choose a DCL with a fixed monthly rate that is lower than what you were previously paying so you can reduce your monthly payments.

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