Take a look at the 5 steps in a consolidation program.
- Debt counseling: The bill consolidation companies will assess your financial needs through a free debt counseling session. The debt counselors will ask for details of your outstanding bills and monthly income and help you find out how much you can pay monthly. The counselors will discuss the possible options for bill consolidation and help to choose the one that's best for you.
- Negotiation: The bill consolidation companies will negotiate with your creditors or collection agency (CA) in order to reduce interest rates. They may ask your creditors/CA to waive off or reduce late fee. If you have taken out credit cards, the consolidation companies will have all the card accounts closed. So, you cannot use the cards any more.
- Prepare a budget: The bill consolidation companies will assist you in preparing a budget based upon your current financial situation. This will help you figure out how much you can afford to pay each month on your bills.
- Repayment plan: Depending upon how much you can afford, the companies offering bill consolidation services or program will negotiate a repayment plan with the creditors/CAs.
- Monthly payment: Start making monthly payment to the bill consolidation company. The company then distributes the payment among your creditors/CAs. However, the company will charge a certain fee for their bill consolidation services from you. So, you should keep aside certain amount for paying the fees.
For example: You have taken out 3 credit cards from a company at the interest rates 15%, 20%, and 25%. The total outstanding balance is = $35000.
This means the average interest rate is (15%+20%+25%)/3 = 20
After enrolling into a credit card bill consolidation program, the counselor will negotiate with your creditors and cut back the interest rates on each credit card.
So, if the interest rates on the 3 credit cards are reduced to 10%,15%, 20% respectively, then the average rate will be - (10%+15%+20%)/3 = 15%
The total amount of money you can save through credit card bill consolidation program = (20% - 15%) * 35000 = $1750 per month.
However, after enrolling into a credit card bill consolidation program, you have to make the payments on time, or the interest rates may increase again.
- Bill consolidation loans: These are personal loans taken out for bill consolidation. Such loans are available at a rate usually lower than the average interest rate at which you're supposed to pay off bills. Thus, you can repay debt with one big loan. Instead of making multiple payments, you need to pay a single installment each month to repay the bill consolidation loan. However, watch out for the loan costs when you go for it.