How does debt consolidation program lower your rates and payment?

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Is debt consolidation program is right for you?

  • Have multiple bills such as spiraling credit cards, medical bills, payday loans etc.
  • Owe a lot of money to several creditors or collection agency.
  • Are on their jobs and have moderate income.
  • Wish to avoid filing a bankruptcy.
  • Can't keep a track of several bills payable to creditors.
  • Can carry on with monthly payments, though at low rates of interest.
  • Can cut down on their spending and save money to pay off bills.
  • Stop charging on their credit cards and avoid incurring additional debt.

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Debt consolidation program helps you pay off your unsecured bills through an easy and single monthly payment plan. This program helps you make only one payment instead of 7 or 8 in every month.

How can these programs help you start a new financial life?

  • Help you make lower payment every month
  • Help to reduce the number of calls you get from creditors
  • Leave you with only one monthly payment plan
  • Help you repay your bills within 2-5 years
  • Help you improve credit gradually
  • May help you knock out the fines and/or late fees

What kind of bills can be paid off through the program?

  • Credit card bills
  • Store cards
  • Personal loans
  • Medical bills
  • Collection accounts
  • Other unsecured bills

Student loans Can be paid through secured/unsecured debt consolidation loans

How much
debt consolidation
can save you

What factors do you need to consider before the consolidation of debt?

How much you want to consolidate
A company may require a minimum amount of debt for you to enroll in the program.
How much you've to pay on fees
Check out the fees and calculate whether or not you're able to pay the amount every month.
How much you need to pay for an interest rate
The main benefit of consolidation is to lower interest and reduce monthly payments. However, repayment term should not be more like opting for it may result in more spending in the long run.

How do debt consolidation programs work?

Check out these 5 steps to know how do debt consolidation programs work:

1 No-obligation free financial analysis – Debt counselors make a thorough review of your income and expenses, along with your debts, to decide upon an affordable amount you can pay every month.
2 Sign a written agreement – You can ask questions (such as fees, monthly payment amount, etc.) during the counseling session. If you're happy and satisfied with the session, you can sign up for debt consolidation services.
3 Get relief from the creditor calls – Once you've cleared your doubts and signed required documents, the counselor starts negotiating with your creditors to lower interest rates and eliminate late fees. They also put forward the payment plan.
4 Make one payment to the company – After the counselors finalize a payment plan, which is accepted by all the parties, you start making the single monthly payment to the company. The consolidation company then disburses the amount amongst your creditors.
5 Re-assessment of your financial situation – Usually, after 180 days, the counselor asks you about your financial situation. If it has become worse, notify the counselor so that he/she can re-negotiate a new payment plan with your creditors as per your current situation.

Pros and cons of consolidation

The pros and cons of consolidating your bills are given below.

Pros

Get reduced interest rates

If you're in a debt consolidation program, the consolidation company you're working with will negotiate with creditors so as to lower your interest rates. So, it'll be comfortable for you to pay back your dues in small monthly repayments.

For example, if you have three credit cards at interest rates of 18%, 12% and 9%, then the average interest rate at which you've been making payments is:

(18% + 12% + 9%)/3 = 13%

Say, after consolidation, the interest rates become 13%, 10% and 7% respectively. Now the average rate of interest becomes:

(13% + 10% + 7%)/3 = 10%

Now if you owe $5000 on your credit cards, then the reduced rate of interest would save you $150 per month.

Single payment vs many

When you enroll in a consolidation program, it enables you to replace several bills with a single monthly payment which you can easily manage.

Positive item on credit report

When you consolidate and repay your debts in full, the accounts are updated as "Paid in Full" in your credit reports. It can help to improve your credit score.

Debt repayment plan

You'll get a debt repayment plan from your creditors or collection agencies. The new plan with reduced interest rates will help reduce your bill payments so that you can afford to pay off at least the principal balance in full along with some interest.

The plan is developed such that you won't default while in a debt consolidation or bill consolidation program. You'll be able to save dollars and organize your finances better.

Reduction/elimination of late fees

When you default on a debt account, late charges, penalty fees, and accrued interest pile up with time. These can be reduced or even eliminated by negotiation, in a debt consolidation program.

Get debt free faster

If you pay a little more than the minimum on your credit cards, you'll take comparatively less time to pay off the debt. A consolidation program helps you to make payments such that you don't have to carry on with an account too long. Thus, it accelerates the period you need to get debt free. With this program, you can eliminate debt in just 4-6 years compared to an average period of 20 years or more.

Get rid of collection calls

One benefit of debt consolidation is that when you sign a power of attorney with the consolidation company, your creditors and collection agencies usually stop contacting you. This saves you from being harassed by creditors.

Free debt counseling

Another benefit of debt consolidation program is that most consolidation companies offer free debt counseling service to debtors willing to consolidate their bills and debts. The counseling session allows you to analyze your situation and discuss your options to get financial freedom with a debt consultant. This is to make sure that you know what's best for you.

Cons

It may take longer to get out of debt:

With a consolidation program, you can get debt free within 4-6 years. But when you take out a consolidation loan to repay multiple bills, you remain in debt until and unless you repay this loan. The consolidation loan is usually a long term obligation, so it'll take you quite long to free yourself from such a liability.

High fees for program:

There are consolidation companies who may charge you a lot of fees for offering their services. You may come across companies which scam consumers by charging fees well beyond the maximum limit set by the state where you reside. To avoid this, compare fees with different companies before you for a consolidation program.

How can you get the best debt consolidation program?

  • Ask your friends to suggest you a good company
  • Find out customers' views regarding the company
  • Check out the accreditation of the company
  • Get detailed information about the program
  • Try to know if the counselors are certified

The right way to choose the best debt consolidation program is to make a comparative analysis of different consolidation companies in your locality. Check out the list of some reliable companies and then compare the programs to choose the best one for yourself.

What are the reasons behind the popularity of online debt consolidation?

  • You can get a fresh financial start
  • Your payment process can get accelerated
  • You can get debt consolidation help 24*7
  • Easier for you to make your monthly payments quickly
  • You can compare various online companies from your home
  • You can get free counseling online and save time
  • You may get fast debt consolidation service

Can you consolidate multiple bills for free?

No, most companies do not offer free debt consolidation service. However, here are 2 ways by which you can consolidate your bills for free.

Consolidate your bills all by yourself
You can negotiate yourself with your creditors and set up a reduced payment plan. Check out the steps to consolidate bills yourself.
Get help from a non-profit company
You can approach a non-profit debt consolidation company to consolidate your bills by paying a nominal fee.

FAQ

Can I choose the debts that I want to consolidate?

Yes, you have an option of choosing which debt you want to consolidate through a debt consolidation program. You may leave out one or two debts, or you can pay all.

How do I know if an account is in collection?

Your credit report can tell you if your account is with the creditor or sent to collection. You can pull your credit report from any or all of the credit bureaus such as: www.experian.com, www.transunion.com, and www.equifax.com

Can you help me if I have late payments?

Yes, we'll be able to help you even if you have late payments or haven't made any payment at all. Once you enroll for the debt consolidation program, you can pay off the dues and get current on payments.

How secure is my personal information?

We value your privacy and assure you that your personal information will not be disclosed to any unrelated third party. Check out our privacy policy for further details.

How much should I pay for debt consolidation?

You need not pay anything for the counseling session. If you are satisfied with the free counseling session, you can avail our services at an affordable fee.

Will my consolidation fees be tax deductible?

No, the fees you pay to a debt consolidation company are not tax-deductible. Know in detail all the consequences ...

Is the completion rate of a consolidation company and a law firm the same?

Fewer than 40% of the people who start a debt consolidation program with companies that are not law firms complete it. The success rate of law firms is close to 90%.

How can debt consolidation simplify my monthly payments?

While using debt consolidation, all your debts will be replaced with one single debt with lower interest rates. Instead of paying different amounts to different lenders, you will need to make and fixed single monthly payment. This surely helps in simplifying your monthly payments.

Are the advantages of debt consolidation the same irrespective of what option you opt for?

Yes, the primary advantages of debt consolidation are the same irrespective of whether you enroll in a consolidation program, take out a consolidation loan, or opt for balance transfer method. However, if you enroll in the program, you’ll get rid of collection calls and complete professional guidance to repay your outstanding dues in full.

Can debt consolidation affect your credit report and score negatively?

Though apparently consolidation helps to improve your score and has a positive effect on your credit reports, yet it can affect negatively too. How? When you opt for a consolidation program and have to make a single monthly payment, that too at a lower rate of interest, you can have a tendency to spend more. This can actually offset the benefits of consolidating debt. So, opting for consolidation is not the ultimate thing. After opting for consolidation, you have to avoid charging your credit cards so that you don’t increase debt. Likewise, if you opt for balance transfer method, you repay the balance at a must lower rate. But, make sure you repay the balance within the low introductory period of the card to avoid paying much more interest on the remaining amount after the period is over. The main idea is that reduce your expenses, save more, and make the consolidated debt payments on time to improve your credit report and score.

How a consolidation program can be a suitable alternative to snowball method

You might have heard about the “snowball approach” that many people advocate when paying off debt. When using this approach, a person in debt takes all their bills and outstanding obligations and lays them out side by side, ordered from lowest to highest balance. The debtor then pays the minimum balance on each bill and then puts any surplus funds towards paying off the smallest one on the table. Once the smallest debt is paid, one can then keep moving up the line and gradually tackle larger and larger debts. The hope, of course, is that your debt payments will snowball - that you’ll start small but then gradually empower yourself to move up the debt ladder.

In theory, this is a great logistical and psychological way to approach debt. In reality, however, the snowball method ignores varying interest rates across different bills. After all, your largest bill may have the highest interest rate, meaning that you only stand to cost yourself money by putting it off and paying it last. The method also attempts to break debt into pieces, a move that works for some but may actually leave many people less motivated and less connected to the realities of their debt.

So what debt-reduction solution can counter the snowball method’s deficiencies while also providing motivation? While every situation is unique, debt consolidation is usually a worthwhile effort. Let’s break it down:

  • Interest: While the snowball method ignores the importance of interest, debt consolidation usually reduces some individual interest rates by putting all bills on equal footing.
  • Psychology: The snowball method gives people an incentive to start paying off debt since small debts are more manageable and less overwhelming. But after each individual debt is paid, the approach creates a natural break after which a person must then muster the motivation to advance to the next level. This can take the wind out of many debtors’ sails. The debt consolidation method, on the other hand, gives people an impetus to start paying (because they can take the easy first step to consolidate) and then it provides motivation to continue (because once you start paying there’s no natural break in the process during which one may stop).
  • Perspective: Debt isn’t about individual bills; rather, it is one solitary burden that ultimately reflects money out of one’s pocket. While consumer debt and student loan debt may seem different when each is incurred, both ultimately amount to money lost and numbers on a balance sheet. While the snowball technique obscures this truth by creating different “kinds” of debt, the consolidation approach forces debtors to recognize, acknowledge, and tackle the burden in full. Someone who follows the snowball route may find themselves still incurring small credit card debts because those are easy to pay off. A disciple of consolidation, meanwhile, is more likely to use Green Dot prepaid debit cards and act more responsibly in all areas of personal spending.

These are the main ways in which the snowball method is deficient and where debt consolidation is usually preferable. While this is certainly not true for every person and every situation, it is worth keeping in mind the next time you try to make a plan to motivate and help yourself out of debt.

Last Updated on: Wed, 25 Nov 2020