How Does Bill Consolidation Work?

What is Bill Consolidation?

Bill consolidation is converting several smaller bills into one larger bill. Bill consolidation is usually done with loan bills, such as bills for credit cards, car loans and student loans. When debts are consolidated, a lender buys out several debt obligations of an individual to offer her a single larger loan. The consumer begins by finding a consolidator, then the two work together to form the terms for a new loan based on the debtor's existing loans. If and when an agreement is reached, a contract is signed, and the consolidator contacts the original lenders and pays of the loans to be consolidated in full, binding the debtor in a new, larger loan. This can benefit lenders because it allows them to lend larger amounts of money, while having the information of the individual's payment history on the original loans to judge the risk the borrower presents.

Why Consolidate?

Consolidating debt bills can be a useful tool for anyone that has several debts, and it falls to the debtor to seek consolidation, so it is useful to know why and when consolidation can be useful. Consolidating bills to one larger payment reduces the chances of missing a payment, since there are fewer payments to make, and therefore it reduces the chances of damaging your credit score. Consolidation can also eliminate unfavorable terms of certain debts, such as variable interest rates, since the new loan has its own terms. Consolidating can also end up saving money over time, since the interest rate owed will be based on the previous debts, but may ultimately be lower if your credit rating and financial stability have improved since you first took out the debt.

When to Consolidate

Consolidation is a useful tool, but only in the right circumstances. If you have many small bills and have difficulty remembering to make payments on some of them, consolidation is a good idea. If you are locked into debts with variable interest rates and you expect interest rates to rise (basically if interest rates are low, they are likely to go up rather than down) it can be wise to consolidate to avoid potential rate hikes. Similarly, if you have fixed-rate loans that started at high interest rates, but rates have subsequently declined, consolidation can often allow you to reduce your interest rate. In some cases consolidating can actually raise interest owed, especially if you have a loan with a very low interest rate, such as a federal student loan. Sometimes it is best to leave low fixed interest loans out of a consolidation. Consolidation can also be useful when payments become too burdensome, since the consolidated loan can have a longer duration meaning the payments are smaller and spread out over a longer period of time.