Debt consolidation, also known as bill consolidation, refers to the process of borrowing money from a single lender to pay off debts from numerous creditors. In consolidating debt, the money is borrowed at a lower interest rate than the interest rates for the original debts. In addition to reducing the cost of borrowing money, debt consolidation allows the borrower to deal with a single entity rather than multiple creditors.
Benefits
The most apparent benefit of consolidating debt is convenience. In managing a customer, debt consolidation companies deal with the customer's numerous creditors, acting as the bridge between the borrower and his creditors. The customer has to work with the debt consolidation company as it negotiates payment terms with each creditor, on behalf of the customer. In return, the customer makes monthly installments to the company, which handles the money owed to the creditors.
Documentation
Managing debt through a debt consolidation company entails providing all documents pertaining to creditors, such as amount of credit, and the most up-to-date contact information. Before negotiating terms with the customer, the debt consolidation company reviews all submitted bills and amounts owed to each creditor. Debt consolidation can cluster multiple payments, such as for furniture, car, medical bills, credit card bills and personal loans, giving the customer the option to move forward with a single monthly payment.
Financial Advisement
When the customer applies for debt consolidation, the company reviews the documents and analyzes the customer's financial situation. In managing debt, a financial adviser from the company works with the customer in managing his debt. The adviser speaks with the customer to determine the amount of total debt, and how much the customer can afford to pay each month without having to make substantial changes to lifestyle. Taking into account the financial situation, the adviser works with individual creditors to devise a monthly payment plan.
Collateral
Debt consolidation can be obtained by using home equity as collateral in a mortgage, in which the home equity is the customer's share of the property. This amount is calculated by deducting payments made toward the loan from the total loan amount. In mortgaging a customer's home equity, the maximum amount that can be used as collateral is based on the present market value of the property. Debt consolidation by mortgaging home equity can be either a simple home equity loan, or a home equity line of credit, called HELOC. Both types are second mortgages, and unlike a home mortgage, they have a much shorter lifespan.
Choosing a Company
When deciding on a data consolidation company, one of the most important factors to consider is interest rate. If a data consolidation company charges a customer a similar interest rate as his original debts, the customer will not benefit from the arrangement and will have to make significant payments for the loan each month. Apart from interest rate, other costs to consider include application fees, evaluation and closing fees, and administrative and insurance costs. Before committing to a company, a borrower should research the market and approach the company that suits his financial situation.
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