How Does Debt Consolidation Work?

One of the worst things about falling deeply into debt is dealing with multiple creditors. There’s too many accounts to keep track of, a stack of bills on your desk each month, and if you fall behind, a steady drumbeat of phone messages from creditors who want to be paid. In these circumstances, debt consolidation may be helpful. How does debt consolidation work? There are two main debt consolidation options: debt consolidation by taking out a loan, and debt consolidation programs such as those offered by American Consumer Credit Counseling (ACCC) that do not require you to borrow.

How Does Debt Consolidation Work with a Loan?

One common approach to debt consolidation involves taking out a loan. How does debt consolidation work when a loan is involved? Essentially, you take a sizable loan, use those funds to pay off all your creditors, and then make monthly payments on the loan. The loan may be obtained through debt relief companies, or through your bank, or as a home equity loan if you own a home.

Although this approach has the basic appeal of consolidating your debt into one monthly payment, there are significant costs and risks involved:

  • The interest rate on a debt consolidation loan is likely to be high. The rate may be lower if you’re using a home equity loan for this purpose, but if you take that approach, you’ll potentially be jeopardizing your home ownership if you fall behind on your loan payments.
  • With this approach to consolidation, the credit cards and store cards that you pay off with the loan will remain open. This raises the very real possibility of running up new debt on those cards, on top of your consolidation loan debt.
  • Consolidation loans are too much in the vein of “robbing Peter to pay Paul”. You’ve shifted your debt but haven’t really done anything to address the underlying problem.

How Does Debt Consolidation Work with ACCC?

As one of the nation’s leading non-profit debt management agencies, ACCC offers a way to consolidate unsecured personal debts without having to borrow more money. How does debt consolidation work with ACCC? In short, we work out an arrangement with your creditors whereby you make one consolidated payment to ACCC each month and we then make the monthly payments to your creditors.

What are the benefits to this approach to debt consolidation, beyond simplifying your monthly payment requirements? There are several important benefits:

  • Often creditors participating in this personal debt consolidation program are willing to reduce your interest rate and waive outstanding fees such as late fees or over-limit fees.
  • All or most of your credit accounts involved in the program will be closed to further spending, so you can make genuine progress on reducing and ultimately eliminating your debt.
  • The program includes financial counseling geared toward helping you enhance your credit management skills so you can steer clear of debt problems in the future.

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