Debt Consolidation Primer - How Consumer Debt Consolidation Works

Consumer debt consolidation isn't always the easiest financial concept to grasp and most debt consolidators don't make it much easier. If you've been overwhelmed by bill collectors and debt consolidators wanting to take your money, the confusion of what to do may stack on a new level of stress. Consolidation is a simple concept really. Combine all of your debt into one new loan, with one payment, a lowered interest rate, and possibly an overall debt reduction... Now were getting somewhere.

You dont have to be in debt to be concerned about it or feel it beneficial to consolidate. Whether you've been a victim of unemployment or are still making a good income, you may want to gain leverage and get involved in your financial well being.

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Let's face it, most of us need to control our consumer urges. We've grown accustomed to bad spending habits. But for some, managing debt may simply boil down to managing our money.

There are a few ways to accomplish this. debt consolidation loans, consumer credit counseling and debt management services.

Debt consolidation loans
a debt consolidation loan is a brand new loan created to pay off a number of old loans and credit lines, often created by a traditional lender. If you own a home with equity, restructuring debt should be easy, but keep in mind that lenders rules still apply. Try not to let your arrears get so far as to ruin your credit rating, and by all means, don't stop making your payments! (Even if its $5 a month). The following are a few do it yourself methods.

1. Open a new second mortgage, usually through a home equity loan, or home equity line of credit. These typically have lower interest rates and are payable over a shorter period of time than a first mortgage.

2. Refinance your first mortgage, using the extra cash from the equity of your home to pay old debt. If you can lower the interest rate on your first mortgage by at least 1%, it's a good time to refinance.

Pros: lower interest rates. One payment for all your debt. Tax advantages. Power to settle payoff balances at a reduced amount.
Cons: additional closing costs. Less equity in property (higher risk). Debt negotiation not included. Converting unsecured debt to secured debt.

3. If you don't own a home, you may seek qualification for an unsecured personal loan through a bank or credit union to consolidate debt.

Pros: consolidation without owning a home. One payment for all your debt. Possibly lower interest rates. Power to settle payoff balances at a reduced amount.
Cons: no tax benefits. Harder to qualify for because they are not secured by collateral. Debt negotiation not included. Typically higher interest rates than a mortgage.

What type of debt can be consolidated?

Credit cards, medical bills, second mortgages, automobile loans, practically all debt can be consolidated, even tax liens can be paid off with a consolidation loan.

Note: student loans can also be consolidated but student loans typically have a lower interest rate than a first mortgage or home equity loan. Also, student loans are usually unsecured loans. To consolidate them using a mortgage would be converting them to a secured loan, using your home as collateral, putting it at a higher risk.

If you don't feel comfortable structuring your own debt consolidation with the help of a bank, there are definitely other viable options.

Consumer credit counseling
consumer credit counseling is a service that will help you by offering to advise you on how to manage your money and current debt. This includes offering solutions to the problems you're facing now with your finances and helping you develop a plan to become stable in the future. Credit counselors will examine and analyze your income and expenses and debt, and create a budget for you. This service should be personally geared to your situation. There are many services available, profit and non profit.

Debt management programs
if you're in over your head financially, a debt management program may be a great answer. Debt management is a service provided by many credit counseling companies, that helps you pay your existing debt, usually over a 36-60 month term, with additional help in creating credit when your payments have been successfully completed. Debt management counselors should work with your creditors to negotiate reduce finance charges, late fees, monthly payments and your pay off period.

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