The Pros And Cons Of Debt Consolidation

Credit debt consolidation programs are best suited for those who have a large number of unsecured loans. This method basically aims at consolidating the payments to one monthly payment and reduce the burden of installments. This method requires a professional help. The consolidation firm chosen by the consumer will actually send out a trained consolidator who will contact the creditors individually and ask for reduction in the interest rates and elimination of some allied expenses for the loans. These allied expenses generally refer to the following:

1. Hidden insurance charges.
2. Late fee.
3. Service charges.
4. Over limit charges and other applicable charges.

To force the creditors to agree to do so and to re-amortize the loans, the consolidator uses the threat of bankruptcy. The creditors eventually agree and act accordingly. The loans are then re-amortized and rescheduled. The consumer then needs to pay once to the consolidator every month and then the consolidator takes up the burden to divide the money among the creditors. This way the consumer pays only once and the amount he pays is less compared to the payments before consolidation. This method has some pros and cons. Let us take a look at those pluses and the minuses.

Pros Of Consolidation Programs:

1. The monthly burden of multiple installments is removed and also the total payments are reduced.
2. The consumer never required to deal with the creditors.
3. The credit score of the consumer remains intact.
4. The problem of managing the loans is taken care of by the consolidator.
5. The method is exceptionally good for multiple loans (more than 3 unsecured loans).
6. The payment method being well structured helps the consumers to track their financial condition and helps in expenditure management pretty well.

Cons Of Consolidation Programs:

1. The method is not very effective if the number of loans are less (less than or equal to 3).
2. The method is a long method of debt elimination and takes nearly 5 years to move out of the dues.
3. The method requires a monthly fee payment to the consolidator till all the loans are repaid.
4. The amount of reduction in the interest rates is not significant.
5. It is difficult to find a non-profit consolidation firm with a valid IRS code.
6. For this method, the consumers need to have steady income and in case one of the installments fail after the consolidation deal is signed, the entire deal will be deemed null and void!

Debt settlement is a viable option to filing bankruptcy and is becoming increasingly popular amongst Americans with over $10k in unsecured debt. Creditors are ready to negotiate.