More Americans are swimming in debt than ever before because of the struggling economy and a high national unemployment rate. Because of the increase in financial problems, there is also an increase in the demand for debt consolidation loans and the services of debt consolidation companies. The question is: should you be turning to these companies for help or is debt consolidation something you can tackle on your own?
What Is Debt Consolidation?
Debt consolidation is the combining of your debts into one payment. Typically, this is achieved by establishing a new loan that has a lower interest rate than the rates you are paying now. Several different ways exist that you can go about obtaining a debt consolidation loan. The loan may or not be called a debt consolidation loan, but if you turn to a debt consolidation company to achieve the consolidation, then it is a debt consolidation loan.
One important factor to keep in mind when you choose to consolidate your debt through a company is there are limitations on the types of debt eligible for consolidation. Debt consolidation companies are only able to help you with unsecured debts. Unsecured debts include those that do not have asset associated with the debt, such as credit cards. Secured debts like a home loan or an auto loan are not eligible for debt consolidation with a debt consolidation company.
[Free Resource: Check your free credit report and score]Working with a Debt Consolidation Company
When you work with a company, you work directly with a representative that goes over your debt and determines which accounts are eligible for consolidation. The representative may contact the creditor and try to negotiate lower interest rates or a balance reduction. Once the negotiations are complete, the debt consolidation company extends a new loan to you with a set interest rate and monthly payment that you make directly to the debt consolidation company. To set up this new loan, the debt consolidation company paid off the existing credit accounts that were a part of the consolidation.
The problem with using a debt consolidation company is that it does not always leave you in a better situation than the one you were in originally. First, the company charges you fees for its services. Second, the interest rate on the debt consolidation loan may not be lower than the overall rate you were paying on the original debts. Third, the term – or number of years of the loan – may extend beyond the length of time it would have taken you to pay off your original debts.
DIY Debt Consolidation
It is possible to consolidate your own debt without the help of a company. Start by contacting your creditors and entering into negotiations with them on lowering the interest rate on your accounts or reducing the total balance you owe. The negotiation process takes time, but is worth the effort. Before you obtain a loan to pay off your old debt and consolidate it into new debt, do the math on what the total amount is that you will end up paying with your financial situation as it is and what it will be if you use the consolidation loan. If consolidating your debt ends up costing you more money in the long-run, then it is not worth doing.
For more tips and tools to help you get out of debt faster, including a personalized payoff plan that shows you exactly what you need to do to become debt-free sooner and save potentially thousands of dollars in interest, visit Quizzle.com.
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