Credit usage in America has allowed many Americans to live a life that is beyond their means. While many people have enjoyed their new cars, designer clothes and modern technological devices thanks to many types of credit instruments, these credit options have caused many Americans to become mired in a struggle for their financial lives. While some people find bankruptcy to be an effective means to escape the pressures of seemingly overwhelming debt, others find the option of bankruptcy to be morally or socially unacceptable. Many of these people turn to debt consolidation companies to help them with their financial problem.
What Is a Debt Consolidation Company
A debt consolidation company is a firm that helps people restructure their debt without declaring personal bankruptcy. The debt consolidation firm collects the financial information of their client and attempts to restructure each individual debt into one larger sum, often with a lower monthly payment than the consumer previously paid individually. Many debt consolidation companies require the consumer to offer some type of collateral in return for the debt consolidation services provided, most often requiring the consumer to offer their home as the collateral.
Benefits of Debt Consolidation Companies
Debt consolidation companies and debt reduction companies can be beneficial and effective in helping consumers reduce and pay off or pay down their credit account balances. These companies achieve this through a number of means, including, but not limited to negotiating reduced account balances, negotiating late fees and over balance fees. Another benefit, albeit a psychological one, is that the consolidation company corresponds with creditors, helping the consumer to avoid often intimidating confrontations with those to whom they owe money.
Drawbacks of Debt Consolidation Companies
Debt consolidation companies, while oftentimes rendering a useful service, also present drawbacks to potential customers. Many of the products and services offered by debt consolidation companies impose extremely high rates of interest and seemingly punitive fees. According to a CNN Money report from December 21, 2010, some consumers who have utilized the services of a debt consolidation firm have paid these high fees without receiving any debt consolidation or reduction benefit.
Professional Advice
Dave Ramsey, a personal financial expert, is adamantly against the concept of debt consolidation. Ramsey has proclaimed that debt consolidation is a "con" due to the fact that debt consolidation does not rid the consumer of debt; it simply restructures it. He recommends that a person who carries a large amount of debt should not consolidate the debt, but work extremely hard at paying the debt off by living on less money than is made and possibly acquiring an additional revenue stream, such as a second job.
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