If you are going through a difficult financial period, struggling with more than a single financial obligation, and you have not used or even heard about debt consolidation, this article may be just the thing that you need to improve your financial situation and your chances of paying off all of the money that you owe as soon as possible.
Debt consolidation basics
Basically, this is a financial method that is designed especially for people who are struggling with more than a single financial obligation. Regardless of the types of debt that you are carrying, whether it is medical bills, credit card balances, payday loans or others, with debt consolidation you combine all your current financial obligations bills into a single monthly payment. The purpose of this service is not only to ease your repayment process but to improve your chances of actually getting rid of your financial obligations by improving the terms on your loans. This includes a lower interest rate and a reduced monthly payment.
How does debt consolidation actually work
There are different types of consolidation that work a bit different from one another. However, the basics are pretty much the same. All types of debt consolidation involve the combining of multiple bills into a single payment. This is the main feature of the service and so it is present in every type of debt consolidation.
Different financial obligation consolidation types and how they work
Among the different ways of consolidating multiple financial obligations, there are a few that are often used by people who are going through such financial troubles. You can generally consolidate your loans in two ways – with a debt consolidation loan or with a debt management plan or program.
Debt consolidation loans
This type of financial obligations consolidation is the preferred method. Unlike other types of bills consolidation, with debt consolidation loans, you are not only getting a single monthly payment instead of your multiple ones, you are also getting that payment in the form of a brand new loan. That’s right, you are basically shuffling all your existing bills into a brand new, much larger loan. This loan, of course, comes with new loan terms. Whether these terms are going to be better compared to the terms that you already had on your multiple financial obligations will depend on many factors, mainly on the state of your credit score. Of course, there would be no point in consolidating your multiple bills if you would not be able to secure better loan terms, other than getting that single monthly payment. If you have a stellar credit score or at least a decent one, you will much likely qualify for a lower interest rate debt consolidation loan without much trouble. Having a poor credit score will make that task a lot more difficult. However, there are many private loan lending companies who are willing to work with customers with bad credit scores, and these loan lenders offer rather competitive terms. If you are not able to secure a lower interest rate for your new loan, you can at least try to qualify for a reduced monthly payment which can also have a big positive impact on your financial situation and can ultimately allow you to repay the money that you owe a lot easier.
Debt management plans
This is a service that is often recommended by many financial specialists. With debt management plans, you are also getting a single monthly bill instead of different bills that you are paying each month. However, you are not taking out any new loans. Most financial experts suggest that you work with a non-profit DMP organization for your financial obligation management plan. The job of this non-profit agency is to contact all your creditors and negotiate better terms for all of your existing financial obligations on your behalf. Normally what your company of choice should be able to achieve is an agreement with your creditors to lower the interest rate on your financial obligations and reduce your monthly payment. The latter normally means that the repayment period of your debts would need to be extended. Again, same as with debt consolidation loans, if you have a perfect credit score and stable monthly income, it would be easier for your DMP non-profit agency to negotiate better terms for your loans.
What is the DMP process
The process is quite simple. The first thing that you need to do is to go to a counseling session. The purpose of that session is for you to get detailed information on what the service is and how it can help you, as well as to determine the maximum amount of money that you would be able to afford to spend for the repayments of your multiple financial obligations. If you are pleased with the session and want to continue working with that agency, the next step is for the non-profit organization to contact all your creditors and to start the negotiation process. After all, parties agree to the new terms and length of the repayment period, you start making your single monthly payment to your DMP company, after which the company splits that payment between all your creditors.
Why is it a good idea to consolidate your multiple financial obligations with debt consolidation?
As you know by now, consolidating your multiple financial obligations usually comes with many benefits that can help you to overcome your financial difficulties and reach your goal of financial freedom. We are now going to list the three major benefits that debt consolidation offers so that you can make your decision easier:
Lower interest rate
In most cases, this is the thing that people are most interested in. As we have already mentioned above, lowering the interest rate on your financial obligations will mainly depend on your credit score among other things.
Single monthly bill
You may be tired of hearing about it but it is, in fact one of the most beneficial features that debt consolidation has to offer. Having just a single payment each month will allow you focus on your other, regular monthly expenses and will minimize the chances of any late payments and the fees that come with them.
When you are struggling with multiple financial obligations, having a reduced monthly payment can really allow you to succeed with your repayments as it will give you some breathing room in your monthly budget.
Keep in mind that even though debt consolidation is a great financial method for dealing with multiple financial obligations, it is not a quick fix that can make all of your financial problems disappear overnight.