What is Debt Consolidation?

In today's rough economy, many people have lost their jobs and struggle to pay their bills. They based their bills off of what their salaries were, but now that the jobs are lost they are out of resources in most cases. This is where a debt consolidation loan can help. Debt consolidation is the practice of obtaining a loan to pay all of your bills, and then having one bill to pay each much rather than several.

This process typically saves people a lot of money, because more often than not, the debt consolidation loan payment will be cheaper than what all of the other payments combined were. This is especially a great bargain if your credit rating is good enough to qualify for low interest rates.

Cheaper payments, lower interest rates, convenience and the ability to repair credit are all reasons why people might take out a consolidation loan. If their credit was less than stellar before, then paying off all of those small bills could substantially increase their credit score to allow them to have good credit.

However, most small loans are unsecured. If the total balance of all of the bills is a high amount, then most loan companies will probably want to secure the loan with collateral. This means that a person would have to have a home or something worth a substantial amount of money in order to take out a consolidation loan. People without collateral backing may find it difficult to get a consolidation loan.

Many loan companies will give these loans without even performing a credit check. This is fantastic news for those who have missed payments, bankruptcies or other adverse information on their credit reports. They will however verify your employment status.

A person will usually need to be at their current job for one year, and will need to have their debt to income ratio pass a test. When calculating the debt to income ratio, they will count what the consolidation payment would be, not what your current payments are paying the bills individually, so it should be easy to pass on this part of the requirements.

Some debt consolidation loan companies will pay the full balances to settle a person's debts, or they will negotiate with each of the creditors for a lesser amount to settle the debt in full. There are a variety of programs that work in different ways that these companies offer.

During the initial consultation, the debt advisor will determine which program fits a person's individual needs. Contrary to popular belief, settling debts for a lesser amount will not harshly affect a credit score. Whether you pay the full debt or settle it for a lesser amount, the difference is only a few percentage points in the score difference.

A debt consolidation loan may be just what a person needs to not run so short of money all the time. Many companies can prequalify a person with just minimal personal information. All that is required for a prequalification is a one page form. If you are a person that is considering debt consolidation, make an appointment with a company in your local area to see what might help you and your personal situation. 


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