Debt Consolidation

For many families in Michigan, and all across America, debt consolidation may be a good option to reduce debts and lessen stress. So, what is debt consolidation? In the debt relief industry, the term debt consolidation has become a sort of "catch-all" phrase for multiple forms of debt relief such as debt management, credit card counseling, and even debt settlement.

To put it simply, debt consolidation involves combining debts (usually those with high-interest rates) into one, more manageable payment each month.

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Debt Consolidation Loans

In many cases, individuals who seek debt relief may opt to get a debt consolidation loan. Unlike other forms of debt relief, taking out a debt consolidation loan involves combining one's higher interest debts into a single lower interest loan. The idea is, once these individuals get approved for their consolidation loan, they would make timely monthly payments, reducing their debts, and eventually paying them off.

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While a debt consolidation loan is a viable solution for eliminating one's debts, it may not be as simple as it sounds. In fact, there are hidden pitfalls that one needs to be aware off before proceeding with a debt consolidation loan.

First, when you apply for a debt consolidation loan, you will often pay it off using secured funds, usually your home or other assets. If, for some reason, your financial situation worsens and you default on your loan payment, you may have put your home in jeopardy. Another thing to consider: some people who take a debt consolidation loan may end up running up a whole new stack of purchases on their credit cards. In this case, now they have all these new credit card charges AND a monthly debt consolidation loan payment to make.

Credit Card Debt Consolidation Program

One way that has proven to be effective in reducing loans is via a credit card debt consolidation program, or what is sometimes referred to as a credit counseling debt management plan (DMP). This form of debt relief may be a good option for those individuals who have a stack of unsecured debts (like credit cards, store charge cards, medical bills, cell phone bills, personal unsecured loans, etc) and are struggling to pay these bills every month. To make matters worse, when they miss payments, these same individuals often have to deal with aggressive bill collectors who call them incessantly either at home or at work. While the situation seems dire, you need to know that consumers do have certain legal protections against bill collectors under the Fair Debt Collection Practices Act.

ftc.gov/bcp/edu/pubs/consumer/credit/cre27.pdf

The main thing to remember is, there is way to get relief from credit cards and other unsecured debts, without taking out a loan. The fact is, with a debt consolidation loan, you may actually worsen instead of help your debt situation if you default on the terms of your new loan and end up running high-interest credit card charges. However, informed consumers may find it more beneficial to take advantage of debt consolidation or a debt management plan (DMP). With a debt management plan, a credit counseling service or agency will work with you to help you consolidate all of your unsecured debts into one lower and more manageable monthly payment. This is important since the easier it is to manage your payments, the more likely you are to stay on track with your debt relief program, and the faster it will be to pay off your creditors.

How Debt Management Works

Under a debt management plan, a credit counseling service or company can help consumers arrive at a debt repayment plan that is, hopefully, more realistic and affordable for them. However, for this to work and to help pay off your debts more quickly, you need to stop using and adding new charges to your credit cards. After you make the commitment to stop using your credit cards, the credit counseling service can review all your debts and balances, look at your income and overall financial situation, then determine what the best repayment plan would be for you.

Advantages of a Debt Consolidation Program

Once your credit counselor has a better understanding of your debt situation, they will have the information they need to make debt relief proposals to each of your creditors so that they can help you secure benefits such as a lower interest rate or waiving of late fees and penalties. If proposals are accepted, these benefits will allow you to pay off your debt at a lower interest rate and more manageable and realistic pace for you. All creditors who have agreed to debt relief proposals will become part of your debt management plan (DMP). All your debts will then be combined into one monthly payment that is then made to a credit counseling agency, who in turn will distribute your payments to your creditors based on the repayment plan they have agreed to. The bottom line: Debt consolidation is an honorable form of debt relief whereby you are paying back all that you owe, just in a way that you can more easily afford. This is the advantage of a debt consolidation program that may be achieved by creditors agreeing to reduce their interest rates, eliminate late fees and penalties, and work out a repayment plan that will allow you to catch your breath and pay back the full amount of your debt on a schedule you can afford.

The amount you save via a debt management program and how soon you are able to get out of debt is all dependent on how much you owe, what the existing interest rates are on those debts, the benefits that your creditors agree to extend to you, and how consistent you are sticking to the debt management plan as agreed. It is important to note that, for those creditors who DO NOT agree to be part of the debt management plan, you are still responsible for paying off those debts under the existing terms of your agreements. For those who DO AGREE to offer you lower interest rates, etc. you MUST stay on track each month or the benefits they have extended to you may be taken away. The good news is, if you are truly experiencing financial hardships and creditors have a true picture of your circumstances, they are more likely to agree to give you the opportunity to pay back debts at an interest rate and pace that you can more easily afford.

Compare Debt Consolidation Programs

Before you sign up with a debt management company, look at that company's Better Business Bureau (BBB) rating, which in many cases, is an indication that it has sound and trustworthy business practices. But, keep in mind that ratings like these are just guidelines for consumers, and it is still in your best interest to research a company's policies and fees as thoroughly as you can. It may also be a good idea to request a copy of your free credit report from one of the three major credit-reporting agencies so you can, from time to time, check a listing of all your accounts, balances, and payment histories. When you take such thorough steps when managing your personal credit as well as your outstanding debts, you will be a better educated consumer and more motivated to taking the steps necessary to become debt free.

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