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How Does Debt Consolidation Work

By Jack Brown - Jul 27, 2009

Debt consolidation is the process of combining your existing unsecured debts into one affordable monthly payments. There are 2 classifications of debt consolidation. If you are considering consolidating your debt you can either get a debt consolidation loan or sign up with a debt consolidation service. In this article, I will discuss the distinctions as well as the advantages and disadvantages of each method.

 

Debt Consolidation Loan

A debt consolidation loan is essentially a home equity loan used to pay off existing unsecure debts. To qualify for a debt consolidation loan you must own a home and have equity in your home. You can conveniently apply for a debt consolidation loan online or through most banks. One big advantage of a debt consolidation loan is the ability to significantly reduce your monthly payments. Because mortgage rates tend to be much lower than credit card rates, conslidating your debt with a debt consolidation loan will generally lower your monthly payments overall. Instead of making multiple payments to creditors each month, you will have just 1 payment to make. The only disadvantage of a debt consolidation loan is that it extends pay off of your debt since most loans are 15 to 30 years.

 

Debt Consolidation Service

A debt consolidation service creates a repayment plan for your existing unsecured debt and combines them into one monthly payments. Each month you would make one payment to the debt consolidation firm and they would inturn pay your creditors each month. Most debt consolidation programs charge a low monthly maintence fee. Because debt consolidation firms negotiate directly with your creditors, they are able to win consessions and save you money. Most debt consolidation programs are between 1 to 5 years.

Which is right for you?

Depending on your goals, either a debt consolidation loan or service may work for you. If your main concern is to drastically reduce your monthly payments and you're a homeowner, a debt consolidation loan will allow you to decrease payments. If you want to pay off your debt fast or you do not own a home, joining a debt consolidation program will allow you to be out of debt in 1 to 5 years.

 

Debt Consolidation Union offers custom tailored debt consolidation programs to get you out of debt sooner rather than later. To find out more about our offerings call us toll free at 1-800-957-8310.