There seems to be a large amount of myths circulating about what debt consolidation actually is and how it works. People choose to believe that either it is a one-size-fits-all solution or that it is a scam. So let’s take a moment to define debt consolidation and give you a better picture of what is actually involved in this process.
So What Is Debt Consolidation?
By definition, debt consolidation is the act of combining several debts into one financial obligation. This means that instead having to pay multiple institutions each month, you would only be responsible to one. There are several reasons as to why one would decide to combine their debt. Maybe they would like to secure a lower interest rate and make payments more manageable or they simply want to avoid bankruptcy. Whatever the reason may be, consolidation can be done in one of two ways–with a loan or without.
Consolidation With Loans
Consolidating debt with a loan means that the individual essentially trades all of their debt in exchange for one loan. The benefit is that while fast cash loans companies tend to charge a high interest rate, a debt consolidation loan can offer lower rates. And this usually leads to smaller monthly payments.
Consolidation Without Loans
Credit counseling organizations offer debt management plans–also referred to as DMP. The goal is to assist individuals with securing smaller interest rates on credit cards as well as other debt that is unsecured. They also seek to lower monthly payments. Credit counselors usually work with debt that involves credit cards, personal loans and collection accounts. However, they usually don’t get involved with secured debt such as auto or home loans.
As you can see, there are a lot of things to consider when consolidating debt. However, the better educated you are, the better decisions you will make. Debt consolidation may be just the solution you need in order to receive relief in your monthly payments.