One debt management solution for people with large personal loan, medical or credit card debt is debt consolidation. However, because there are many different ways to consolidate your debt, it is important to understand how debt consolidation works so you can choose the right option for each situation.
Debt Consolidation is a debt management strategy in which multiple debts are combined into a single payment. When this strategy is used, all of your unsecured debts are added together and then you will be given a single monthly payment.
The debt consolidation person or company will take your payment and divide it among your creditors. In reality, what happens is that a lender gives you a new loan that pays off all of your previous loans, and then you make a single monthly payment to your new lender. Obviously, this new loan carries interest, so you will end up paying the full balance of your previous debts plus interest.
For example, if you have thousands of dollars in credit card debt spread across many different cards, debt consolidation could allow you to make a single payment each month, rather than worrying about paying each bill individually on a monthly basis.
Some of the main benefits of debt consolidation are as follows: one predictable monthly payment, flexible terms and no credit impact.
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A debt settlement attorney will help you decide on a plan of action for your case. In a debt consolidation program, all of your debts will be rolled into one. You will typically have to pay a higher interest rate as your debts accumulate into this lump sum. The benefit is that you will not have multiple creditors trying to contact you for payment on credit cards. In the debt settlement process, an attorney will try to reach an agreement with your creditors to reduce the debts you owe. The principal amount you owe will ultimately be reduced in this process.
Typically, the debt settlement company tells clients to make payments to them (which would otherwise go to creditors) while they negotiate with creditors.
Here are a few of the downsides to using a debt settlement company: your debt will grow, your creditors might not settle and debt settlement fees are typically high.
Make sure to only go to an accredited lending institution for debt consolidation.
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