What is debt consolidation?
Debt consolidation refers to a financial service aimed at streamlining debt payments into something that is more manageable. That may mean taking existing loans and consolidating them into a single payment.
People who have several debts may find that combining them into a single debt achieves several favorable outcomes, including:
- Simpler management of the debt repayment process
- Favorable payoff terms
- Lower monthly payments
- A better interest rate
- A possible path to saving their credit score
Debt consolidation is a process that typically begins with a free consultation. One typically discusses their financial challenges with a financial professional, who will guide the inquirer through various options. While the consultation may involve a loan, in many cases they will also try to negotiate more favorable terms with creditors.
Creditors are normally happy to work with debt consolidation companies because it gives them an opportunity to maximize their return of money owed to them.
Upon qualifying for a debt consolidation loan, interest rates and terms will depend on your credit history and other factors. Upon completing the loan application process, you’ll consolidate your debts and begin paying back the new single loan.
The benefits of debt consolidation
- Fast Repayment - A debt consolidation loan enables one to resolve their debts with the original collectors quickly and move the debt to a different collector with better terms. This is especially important when struggling with serious credit card debt.
- Simplify Finances - Debt consolidation loans combine multiple pesky little debts into a single more easily managed debt. There is one loan, one interest rate, and one repayment schedule.
- Lower Interest Rate - While the debt consolidation loan interest rate will vary, typically, it costs less than credit card payments.
- Repair Damage to Credit Score - Debt consolidation services often hurt credit scores at the onset. However, in the long run, they could have a net positive effect when utilized properly with appropriate financial planning. Successfully paying loans back on time will likely be rewarded with a positive credit score.
What to consider when choosing a debt consolidation service
Factors to consider when comparing different debt consolidation companies include:
- Free Consultations - An initial free consultation is standard practice in the industry, make sure to get one.
- Upfront costs - Most debt consolidation companies will ask for a partial upfront payment, which varies widely between companies while others do not have any upfront charges at all. Be aware of upfront payment requirements while comparing services and avoid companies that seek total upfront payment.
- Certified Debt Specialists - The best debt consolidation companies will offer a free consultation with certified debt specialists to find the right solution for a given situation.
<li - Online reviews include professional reviews similar to those available on Lendstart. Additional business reviews are available on platforms like the Better Business Bureau. Both resources will provide insight into customer satisfaction following an interaction with the company, as well as the potential pros and cons of each company.
- Interest Rates - Like all loans, debt consolidation loans come with interest charges. These rates are usually based on your personal information and vary between providers.
- Loan Term - Although longer loan terms often result in smaller individual payments, one will likely end up paying more due to the accumulating cost of interest. Choose the company with the best manageable loan terms for each individual situation.
- Fees and Penalties - Lending and debt consolidation products may carry different fees and penalties. Consider the fees that each company charges for loan applications, handling, and more.
- Requirements - Service providers will clearly state the minimum debt amount one must owe in order to apply for their services. Additionally, they will require a credit score within a given range and a source of income.
- Expect a Decrease in Credit Score - Credit scores will likely take a small hit during the debt consolidation process.
Beware of Debt Consolidation Scams
Unfortunately, debt consolidation attracts a lot of scammers. Make sure to be thorough while researching and comparing debt consolidation companies. Only work with companies with a proven history of helping customers shake off their debt.
Watch out for debt consolidation companies that make huge promises. Some red flags may include:
- Total upfront fees
- High-pressure and aggressive sales tactics
- A lack of transparency regarding fees
- No presence online and no real contact information