SHORT GUIDE TO DEBT CONSOLIDATION

The Basics of Debt Consolidation

What is it?

Debt consolidation is an option often considered by people who owe a great deal of money to many creditors, but have a bad credit score.  The debt consolidation firm negotiates (for free!) with all your creditors on your behalf so that you can have all your debts combined into one debt with a single interest rate.  Payments under a debt consolidation program are also lower, but paid over a longer period of time.  You make your direct payments to the provider, not your creditors. 

The Good

The first major advantage of debt consolidation—provided you do not incur significant new debts after entering the program—is that your situation becomes much less confusing.  You only have to track your progress and plan for one payment instead of several.  In addition, you will have more time to gather the money to pay your total debt.  The smaller payments will also make a smaller dent in your monthly budget.

The Bad

Since the consolidation service-providers do not ask for a fee up front, what is in it for them?  Congratulations: you have just asked the question that will lead you to an understanding of debt consolidation’s one major disadvantage.  As has been said, payments under a consolidation program are smaller, but paid over a longer period of time.  This means that that you will ultimately pay a larger amount of interest under the program than without it.  This is how the service providers make a profit.

Conclusion

Before you agree to take on a debt consolidation plan, try to compute the total amount of money you will pay while under that plan, including interest, and then compare it to the amount of money you pay without the plan.  It is likely that you will, in the long run, pay more money under the plan than without it.  Then ask yourself if having to pay the extra money is worth it, given all the previously discussed advantages of debt consolidation.