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How Does Debt Consolidation Work? A Step by Step Guide

Debt can really bring you down and cause stress in many areas of your life.  If you’re struggling with debt and trying to keep paying all your bills each month, it makes sense to explore your options and figure out a solution that works for your situation. As you begin to figure out how to dig out of debt, you may have been told that debt consolidation is a solution that will help. One of the questions you might have is “how does debt consolidation work?” While not the solution for everyone, debt consolidation, and debt management can help plenty of people pay down their debts and take control of their financial future.

Get Professional Debt Consolidation Advice

Before you start exploring your debt consolidation options, it’s important to work with a credit counselor. Non-profit credit counseling can help you see the big picture when it comes to your financial story. Working with a credit counselor, you’ll be able to see where your money is going each month and whether you are bringing in enough to cover your debts and bills. A credit counselor can help you create a budget,  figure out the best solution to reduce or eliminate your debt, and can help you set realistic financial goals for the future.

Understanding Debt Consolidation

When dealing with debt, a common solution people consider is to apply for a loan that is large enough to cover the amount of all of your debts. You use the proceeds from the single loan to pay off each other your other debts, then focus on repaying the new debt consolidation loan on a monthly basis.

There is more than one type of debt consolidation loan, each of which has their own set of pros and cons. Here are a few of the options:

  • If you own your home and have sufficient equity, you could decide to take out a home equity loan or line of credit to pay off your other debts. One of the benefits of consolidating with a home equity loan is that the interest rate is generally lower than other options. The drawback is that you risk losing your home if you run into difficulty paying back the loan.
  • Alternatively, you can apply for an unsecured loan and use that to pay off your other debts. The drawback with an unsecured loan is that the interest rate is usually going to be much higher, particularly if your credit score is less than excellent. These types of unsecured loans are typically harder to qualify for if you have large amounts of unsecured debt.

Instead of taking out another loan with potential risk factors, another way to consolidate your debts is through a debt management program. A debt management program works much like consolidation since you are making only one payment a month. But, you don’t get a new loan to replace all of your other ones. Instead, the payment you make to your debt management plan is divided up and distributed to each of your current loans by a credit counseling agency. Many creditors will provide benefits while you are enrolled in a debt management program such as lower monthly payments, reduced interest or waived fees. An additional benefit is that many people are able to pay off their debt significantly quicker through a debt management plan than they could on their own.

Avoid Additional Debt

Debt consolidation can help you manage and cope with the loans you already have. But, it won’t necessarily solve your problems, unless you make the decision to avoid additional debt going forward. During the time that you’re in a debt management or consolidation program, you need to commit to not using your credit cards and to avoiding other forms of debt. Once your debts are paid off, you’ll be in the clear and able to enjoy your fresh start!

The CESI Team is committed to helping you reach your financial goals. If debt keeps you from living the life you dream of, contact us for a free debt analysis today and get started on the road to a brighter future!

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