What You Should Know About Debt Consolidation

Millions of people are drowning in debt, and today's harsh economic environment is only making things worse for many individuals.

For those with mounting debt burdens, covering each month's bills can be a challenge. The stress of not only finding enough money to pay the bills, but also juggling the multiple payments and due dates can be overwhelming.

Often, people struggling with uncontrollable debt do not know where to turn. Fortunately, there are options available to assist those who are fighting to become debt-free.

Option 1: Deb Consolidation Loans

With a debt consolidation loan, a borrower consolidates his or her multiple debts into one new loan.

There are three ways in which a borrower can secure a debt consolidation loan:

• An unsecured personal consolidation loan, which does not require collateral.
• A secured loan, such as a home equity loan in which the borrower's home serves as collateral for the loan.
• A home refinance loan with a cash-out option, which provides additional funds beyond the actual mortgage to cover the consolidated debts.

Applying for a debt consolidation loan works much in the same way as applying for any other loan. The borrower's credit history, income and overall debt size are considered. The better the borrower's circumstances, the better interest rates he or she is able to obtain for the loan.

Debt consolidation loans offer several benefits for borrowers, including:

• A debt consolidation loan can simplify a borrower's finances by replacing multiple payments with one simple monthly payment.
• A debt consolidation loan can result in lower monthly payments by providing lower interest rates and extended repayment periods.
• For home equity loans or a mortgage refinancing, the interest paid on the loan is tax deductible in most cases.

Option 2: Debt Consolidation Programs

The irony of a debt consolidation loan is many people who are in need of debt consolidation have credit ratings too tarnished to acquire the loan in the first place. Fortunately, for these individuals, there is another option: debt consolidation programs.

Through a debt consolidation program, a program administrator works directly with the client's creditors. The program then makes the individual payments for the client, who only needs to make one payment each month to the debt consolidation program.

Debt consolidation programs also work with clients to develop debt repayment plans. In many cases, these debt repayment plans provide a way for the client to become debt-free within four to six years.

It is important to note that debt consolidation programs are not free. Typically, these programs come with a one-time origination fee, which covers initial contacts with creditors, followed by a monthly representation fee.

As with debt consolidation loans, debt consolidation programs offer several benefits, including:

• A debt consolidation program can simplify a client's finances by replacing multiple payments with one monthly payment that is made directly to the program.
• A debt consolidation program can reduce the amount of interest a client will end up paying by negotiating lower interest rates with a client's creditors.
• Many debt consolidation programs offer debt counseling to their clients in order to provide them with the skills necessary to avoid becoming overwhelmed by debt again.