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Debt
Consolidation Basics
Debt consolidation is often
associated with non-profit consumer credit counseling services. Although
it may sound like a loan, debt consolidation is entirely different.
Unlike a loan, your debt is "consolidated" and your interest rate
reduced without the need for a loan. A credit card debt consolidation
program will negotiate with your creditors rather than advising that you
take on additional debt. Often these services are a "win-win" situation
for the consumer.
The consumer gets:
- Their interest charges
reduced
- Their monthly payments
minimized
- The convenience of
paying all their debts in one monthly payment
- Through regular
monthly payments, the consumer is back on the road to restoring
their credit rating
- Satisfaction knowing
this program is largely paid for by creditors
No wonder these services
have become the number one recommended way of dealing with excessive
debt.
The way this program works is that a debt consolidation professional
will contact your creditors to get your interest rate and monthly
payments reduced to an amount that you can afford. These professionals
already have working relationship with creditors and know how to get the
best deal for you. If you have a $5,000 debt with MBNA at 21% interest,
a professional counselor will likely be able to get MBNA to lower your
interest rate and monthly payments significantly.
A good company can lower your monthly payments by 50%. Sometimes they
can even eliminate interest charges altogether. This way your entire
monthly payment goes toward the principal. Also you no longer pay your
creditors directly. All of your debts are organized into one manageable
and reduced payment to the debt consolidation company. They, in turn,
pay your creditors on your behalf.
A good debt consolidation company can offer savings over the repayment
period that are dramatic. Below is an example of the typical amount you
might save in interest charges if you used a debt consolidation service
and owed a credit card company $3,500:
Total Payment Not Using Service:
$7,069.98
Total Payment Using Service:
$3,184.98
Amount Saved:
$3,885.00
Do your homework when considering other debt services. Some services may
take advantage of an already vulnerable situation by charging you fees,
sometimes pocketing your first large payment which was supposed to go to
creditors. Make sure you carefully research those who handle your debt
for you. |
