Debt Consolidation

While it normally serves more purpose than just cutting down on the number of bills you receive each month, in it's most basic form debt consolidation simply means taking two or more debts and combining them into just one. This is usually done by taking out a new loan large enough to cover the cumulative total of these multiple debts, then using that money to pay them off. With that done the consolidator is left with just a single, new debt to deal with.

While cutting down on the number of creditors you have might make life a little easier to manage in itself, for most the real purpose of consolidating is to lower the carrying costs of their debts in order to save money on interest. This is done by securing the new loan at a better interest rate than the previous debts, which can lower monthly payments and/or allow the debtor to pay off their principle faster with each monthly payment.

Because the lower interest is key, debt consolidation works best when consolidating unsecured debts such as credit cards into a secured debt, such as a home equity loan. Credit card interest rates are frequently as high as 21% annually, with retail cards charging even higher rates than that. These unsecured debts cost a lot of money to carry every month, especially when compared to secured loans that can be financed as low as 5% in some cases.

While secured debt consolidation normally provides the lowest interest rates and therefore the highest savings; there are still a number of program and options available for those without a house or other sufficient collateral to put up. While the savings might not be quite as significant, if you're carrying a lot of high-interest debt (like those credit cards) there's usually still plenty of room to move.

As long as you can find a suitable loan to cover the debts you want to be consolidated, it's entirely possible to handle the process by yourself. If you're prefer to enlist some professional help, there are a number of business and organizations that can help as well. Some debt management specialists will help secure a consolidation loan on your behalf, and some lenders may offer credit counseling services directly in addition to providing the needed loan. However it's handled the process is essentially the same, your previous debtors will be paid in full with the proceeds of your new loan, a single debt which you'll begin making payments on afterwards.

If you're currently paying more than a few thousand dollars on a number of high interest debts, debt consolidation is definitely worth considering. Whether you pay down more principle each month, lower your monthly payments or do a combination of both, it never hurts to pay less interest. The catch? Successful consolidation requires you're able to qualify for a loan at a good interest rate, which isn't always the case for those of us getting behind in our payments.

If you're not able to get a consolidation loan, you might consider debt settlement as an alternative (many do, and it's not uncommon for settlement to be confused with consolidation, as they work towards the same goal.) Debt settlement is also known as debt negotiation, and works by decreasing what you actually owe to your creditors in terms of principle, rather than just lowering interest rates. Settlement can be hurtful to your credit report, so consolidating should be the preferred option when possible, but you don't need a good credit history and the savings are similar if not better through settlement. (Again - at the expense of some damage, at least temporarily, to your credit report).