When you are in a financial crisis, your first step should be to apply for debt relief. Debt relief will provide you with a number of options to enable to repay your creditors in an affordable manner without becoming encumbered with more debt.
One of the options that you may be offered is debt consolidation. But what is debt consolidation and how can it benefit you.
What Is Debt Consolidation?
Basically, debt consolidation is the process of adding all your existing debt into one sum, payable to one creditor, thereby eliminating all other debt.
How Does This Work?
You, or your debt counselor need to check your mortgage and will need to contact all your creditors and find out what amount would be required to settle your outstanding debt, in its entirety. Some creditors will provide you with a lower settlement amount and others may charge extra fees to compensate them for lost interest due to early settlement of a debt.
This negotiating process is often the most important part of debt consolidation as it can result in owing much less to individual creditors than is reflected on your monthly bills or statements.
Once all the settlement amounts have been determined (which should only take a few days) the amounts are tallied up into one total that can be offered to a new loan provider. This loan provider will then repay all your outstanding debt to your various credit providers.
The Benefit to You
This does not mean that you are debt free, only that you now owe your new loan provider the full amount according to new terms and conditions that are agreed upon. The new terms and conditions should be tailored in a way that makes the repayments affordable to you on a monthly basis.
The terms will involve planning a repayment period over which you will need to repay your debt. In other words, how many months or years you will need to make payments for the debt to be settled. The conditions refer to the amount of interest that will be due as well as any other charges that will be related to your consolidated debt loan. In most cases, you will pay a lower interest rate with no additional charges but over a longer period.
It will also give you the advantage of only having to budget for and manage one repayment per month.
In addition, it can allow you to repair a bad credit record. Once your debt has been settled to your existing creditors, you can contact them to provide you with a letter stating that your debt has been cleared. You can present these letters to credit agencies who will clear your bad listings, although you may need to wait for a period of time.
However, debt consolidation may have some drawbacks and is not always the best resolution to resolve financial problems. Your debt counselor can provide you with the best advice as to whether this is the option to take.