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Understanding the Debt Consolidation Process

23 September, 2017



Households that have encountered serious financial problems have a number of options available. Some attempt to implement strict budgeting. Others consider filing for bankruptcy. One option that can effectively remove debt over time while preserving the finances of the home is debt consolidation. Consolidation involves combining all debts into a single lump sum that is then paid down over time. Successful consolidation can restore a home to financial stability. There are several points that should be understood about the process.

Eligibility

Consolidation does not cover every type of debt or loan. The process generally handles unsecured forms of debt such as a private loan, a credit card bill or a utility bill. Secured debt such as a mortgage and most auto loans cannot be resolved through this method. Additionally, the debtor must have some form of stable income in order to qualify for consolidation. Assets like a home are not always necessary although they can help to negotiate better terms with a lender.

Consolidating Debts

The debt consolidation process involves totaling all of the debts that are owned into a single number. A loan is then issued for this sum. The loan is immediately used to pay off all of the creditors so that no eligible debt remains. The person who received the loan must repay the lender over time. The consolidation loan requires just one payment every month. Payments must be made consistently on time in order to prevent penalties and other issues. The loan normally lasts for several years.

Interest Rates

One of the major benefits of consolidation is that consumers can avoid accruing excessive amounts of debt from creditors because of late fees or high interest rates. There are cases where both interest and late fees on a credit card or utility bill create cyclical debt that is impossible to stop. The interest rate on a consolidation loan might be fixed or variable. Some borrowers use assets like a home or car to help reduce payments by mitigating risk. This is one way that the consolidation loan will save households money over time.

Credit History

The debts that are owed when the loan is issued are paid off completely as soon as approval is granted. The lenders might not even be aware that an individual has approached a debt consolidation service. This means that there will be very little to no impact on the credit history of the individual. Credit history can be protected throughout the process by making payments on time every month in the correct amount and by being careful with any remaining credit cards.

Credit Counseling

Many people who undergo debt consolidation also go through some type of financial or credit counseling. This is because most of the credit cards or bills that cause the initial financial trouble will still be accessible after the consolidation process has started. Individuals must learn how to budget and plan finances properly in order to avoid falling into the same situation in the future. Counseling services can also provide tools that are useful moving forward when new loans or other types of financing become necessary.



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