How Does Debt Consolidation Work
Advantages of debt consolidation
If you are struggling with your financial responsibilities and have multiple creditors after you, chances are you're wondering: how does debt consolidation work? This proven strategy for helping people get out of debt relatively quickly has its advantages as well as its drawbacks, both of which you need to consider as you evaluate whether or not it's right for you.
First, about debt consolidation: how debt consolidation works is fairly straightforward. A debt counseling service works with your creditors to negotiate settlement amounts. Because this strategy is only used when people are deeply in debt and struggling to make payments, creditors are typically very willing to accommodate these requests as they are guaranteed to recover a significant portion of the debt (versus getting nothing if you declare bankruptcy or default completely). Then, you finance your debt consolidation, your creditors get paid off, and you become responsible for only one debt.
Advantages of Debt Consolidation
Answering the question "How do debt consolidation loans work?" is only part of the equation. You also need to consider the advantages as well as the risks and drawbacks to determine if it's truly the best strategy.
The advantages of debt consolidation include a simplified debt structure, which is easier for you to manage. Your debt counselor can typically negotiate a reduction in the overall amount of debt you owe as well as lower interest rates, so you can save thousands of dollars compared to the cost of paying down the individual debts in full. Because you will be out of debt sooner, your credit rating will make a faster recovery than it would if you declared bankruptcy or continued to struggle with a high debt load.
However, there are some drawbacks. Because reduced settlement amounts are negotiated, your credit rating will take an up-front hit. This can prevent you from securing financing for things like automobiles or houses. Second, you're not out of the water -- you're still responsible for the consolidated debt payment. Some strategies include raising capital for the consolidated debt by refinancing assets like your home, which puts your home at risk. Ensure you are able to meet your payment obligations for the refinanced debt over the long term before committing to this strategy.