What Is Debt Consolidation?

When hard financial times occur, especially in times of high unemployment or recession, many consumers face ever-increasing bills which they are unable to pay and subsequently become delinquent. As a last resort, many consumers will declare bankruptcy which appears on your credit report negatively impacting you financially for up to a decade. An alternative is to use debt consolidation services and techniques which can avoid bankruptcy and get you back on a stable financial footing.

The answer to "what is debt consolidation?" is that it takes outstanding debt from multiple sources and combines them into a single loan. While simple in principle it is a little more complicated in practice due to balance transfer fees, for-profit debt consolidation services and the many types of options of how to consolidate your outstanding debt. The goal of debt consolidation is to take multiple high-interest rate loans, such as five or six credit cards, and combine them into a single low interest rate loan. There are a number of tangible benefits when using debt consolidation which are outlined below.

Benefit 1: Pay Down Debt Faster

The overriding goal is to minimize the interest expenses to allow more of the monthly payment to be applied to principal. Over a short period of time this will lower your overall debt burden resulting in easier to make payments.

Benefit 2: One Easy Payment

Combining multiple debts also eliminates the need to juggle payments and pick and choose which bills will get paid this month. Debt consolidation results in one bill being paid which covers all creditors.

Benefit 3: Negotiating Better Terms

Debt consolidation, either on your own or through a nonprofit service, will normally entail renegotiating loan terms which can include waiving fees and penalties, lowering annual percentage rates and smaller monthly payments.

Benefit 4: Increased Cash Flow

Due to lower interest rates and monthly payments, additional cash flow is freed up. This additional money can be used to pay down debt faster or saved to build an emergency fund.

Benefit 5: Improve Your Credit Score

Debt consolidation using balance transfer checks to combine multiple high interest rate credit card debt into a single payment will also benefit your credit report. This is because all other lines of credit will be shown as paid in full and closed and your current line of credit will show consistent monthly on time payments.

Summary

If you are ever asked what is debt consolidation the answer is quite simple. Debt consolidation is the act of combining multiple sources of high-interest rate debt into a single low interest rate loan. This can be done by an individual using balance transfer checks or a home equity line of credit. There are also many national government approved nonprofit debt consolidation services available for consumers. Regardless of which technique you use, debt consolidation is an invaluable opportunity to repay outstanding loan obligations while repairing your credit. No longer is bankruptcy the only option when facing overwhelming personal debt. Debt consolidation has helped millions of consumers reestablish financial stability and move on with their lives.