Black MoneyHave you been looking for different ways to cope with your overwhelming debt? Debt consolidation programs can help you get back on track. However, they can also be an unnecessary hindrance. Here’s what you need to know before you consolidate your debt.

  1. Third-Party Payment Systems – With debt consolidation loans, you can make one payment to the agency the loan is with who will distribute the money to your various creditors until everything is paid in full. These third-party companies don’t make loans or settle debts. They typically offer pre-set arrangements with financial institutions that lower their interest rates and fees, so your payment goes more towards the balance as opposed to the financial charges.
  1. Agencies Can Differ in Quality – When it comes to your finances, you need to be careful about who you decide to work with especially when it comes to debt consolidation loans. Look for organizations that belong to the Financial Counseling Association or National Foundation for Credit Counseling.
  1. All Plans Are Pretty Much the Same – Financial institutions won’t give preferred treatment to any particular organization. While the employees and agencies may vary, the places are pretty much structured the same way. Your counsellor will determine how much it is going to take to pay your creditors in full over a period of time. The payment will usually be about 2.5 percent of your total debt.
  1. Seek Counseling First – This is one of the top debt consolidation tips – why consolidate your bills if there are better alternatives or if you can’t pay for basic expenses? Consolidation needs to begin with counseling. During this session, your financial situation will be assessed and if it seems you have enough cash left after subtracting your expenses from your income, consolidation may be considered.
  1. It’s Efficient, Simple and Steady – While you are on a consolidation plan, the payment remains constant. You don’t need to wonder about how much you may be paying every month, as it is going to be the same until all your creditors are satisfied. Once one account is satisfied, another will receive a larger portion of your payment, and that in turn speeds up the repayment process.
  2. There Is Still Work to be Done – The creditors you owe are still going to be sending account statements which you need to carefully monitor and send in. Agency reports won’t reflect the interest you are being charged, so go over things carefully.

Consolidation Is Not Bankruptcy

However, lenders may actually perceive it negatively. When you consolidate, you pay 100 percent of your obligations. This is different from discharging them in a bankruptcy or even settling the debt. But your credit report can take somewhat of a hit if your monthly repayments are less than what you would usually pay. Furthermore, while consolidation may not be factored into your credit score, some creditors will make note that you are making payments via a third party and this can be a big red flag to anyone who looks at the report. In fact, lenders may view it as bankruptcy as it shows the person requires help paying their bills.

Consolidating your debts can be helpful, but there are ways you may be able to achieve the same results on your own. You could suspend charging and even request rate reductions from your creditors. If they do not agree, you could make a few larger payments and then try again. After that, review your budget so you know exactly what amount you can afford to send each month. Try to pay more to the accounts that have the highest interest rate and once one is paid off, add the payment to the next costliest debt.

Don’t forget to commit to living within your means and be prepared for inevitable financial emergencies.