This article is designed to help the reader understand the pro’s and con’s of debt consolidation. The goal of this article is to help consumers decide whether or not debt consolidation is a viable tool. In today’s economy, many people struggle with overwhelming debt.
There is not a universal fix-all for everyone. Finding the solution to your debt problems requires a bit of research. We hope that this article is beneficial to the reader.
What is Debt Consolidation?
Debt consolidation is a program that is offered by many debt management companies. The basic means by which debt consolidation works is that unsecured debts are combined so that the debtor can repay one revolving payment each month. Payments are usually lower than the total of all monthly payments. This is a viable method to reduce unsecured debts without filing for an Individual Voluntary Arrangement (IVA.) The goal would be that debt be eliminated over a several year period.
How does Debt Consolidation Work?
Typically, debt consolidation in the UK is an arrangement between a debtor and a debt management company and lenders. The debt management company has spent years developing relationships with lenders. The lenders reorganize the debt management company as a solution of prevention. People who enter into arrangements with debt management companies are either at risk or have become delinquent in repaying their debts. The lenders recognize the role that the debt management companies play in recovering outstanding debt.
This means that the lenders offer to discount a debtors debt in exchange for a consistent repayment plan by the debt management company. Below is a diagram of how this relationship works.
Debtor: Owes £ 5000 + monthly interest (20%) = monthly payment of £200.00
Debt management Company + Debtor = Debt Balance £5000 + monthly interest (10%) = Monthly payment of £150.00
In some cases, the lender may reduce the amount of the actual debt. The debt management company is paid as the debtor repays the reduced debt. The debtor makes payments directly to the debt management company who in turns makes payments to the lender. Part of the monthly debt payment contains a fee for the debt management company.
What are the positive benefits of debt consolidation?
The obvious benefit is that the debtor has a reduced monthly payment. There are, however, other benefits to debt consolidation. Those include:
- A viable plan that eliminates debt not just reduces debt.
- Provides a method to avoid an IVA.
- Help to save credit rating.
- Closes revolving and unsecured debt accounts.
- Often provides life skill tips such as budgeting, etc.
What are the negative benefits of debt consolidation?
- The process takes several years.
- It is dependent upon the debtor to make monthly payments.
What is the cost of debt consolidation?
Debt consolidation does not have a specific cost. This is more of a savings to the debtor than a cost of repaying debt. The program usually works by allowing the debtor to pay their debts at a reduction of interests and penalties. Since debt must be repaid by the debtor or dissolved through bankruptcy, debt consolidation does not truly have a cost.
This does not mean that debt consolidation is free. Part of each payment that the debtor makes to the debt management company contains a fee that the debt management company keeps. A good tip for debtors is to ask about the fee schedule before signing up with a debt management company. A lower fee schedule means more money is applied to outstanding debts or monthly payments are lower.
Debt consolidation advice is a viable option for many people who struggle with debt repayment. This is not a solution for everyone. Debt management works best with people who are trying to get out of debt without filing for bankruptcy or an IVA.