What Does "Consolidation" Mean When You Are In Debt, And How Can It Help Me?

Debt consolidation essentially refers to taking out one loan in order to pay off all the others you may have incurred, as well as obtaining a low, or fixed interest rate. It traditionally involves opening a secured loan against collateral, such as a house or a car, with the collateral as an element of risk whose value can be paid back to the lender if necessary. The debt is then consolidated into one loan that can be paid off gradually and consistently rather than at different stages. It is commonly used as a way of paying off credit card debt and student loans. The resulting payments on the loan are often lower per month as a result of acquiring a fixed interest rate. As well as major banks and building societies, several organizations exist to act as advisors and brokers for these deals.

Please be very careful when evaluating debt consolidation options.  For some people, this cure is worse than their original problem (higher rates, higher monthly payments, adjustable rates, etc.).  Talk with a non-profit debt counselor about your options.

Generally it helps. as long as it is a reputable company that oversees the consolidation. What happens is that all your debts are listed. All your income and home finances are listed. The credit card companies, and others whom you owe are asked to forget the interest and take an amount that will satisfy just the balance of the debt. All the payments are totaled up and you are presented with a list of people whom you owe and what they will accept. This is a monthly payment. The payment amount is forwarded each month to the consolidator, who will pay the people, and send you a bill with the amount deducted from each creditor every month. This is good because it stops the phone calls for collection, better than bankruptcy, starts to repair your credit, because you are paying what you can (many times more reasonable than the finance charges tacked on). Whenever the creditors are paid they are removed from the list, and your payment decreases, until you are debt free.

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