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“Debt consolidation” is a term that many people know but few people really understand. They know that it’s something that people who are deeply in debt can use to help themselves get back on their feet, but when it comes to explaining how that process actually works, they’re clueless.
It’s understandable why so many people would be in the dark when it comes to debt consolidation. On one hand, it’s not like anyone explains the process when you start to use credit and go into debt - in fact, they likely don’t want you to think about the fact that you could get to a point where you would need to pursue debt consolidation in the first place.
On the other hand, many debt consolidation companies aren’t totally transparent about what they do. Debt consolidation and debt relief in general are industries that tend to attract disreputable organizations and bad apples. That’s because, unfortunately, individuals in debt are desperate and can be easy to take advantage of. Those disreputable companies don’t want their potential customers to fully understand their debt consolidation options. They just want them to pay up.
For these reasons and more, if you’re interested in the relief that debt consolidation can offer, it’s vitally important that you really understand what debt consolidation is all about. If you’re interested in finding out just how a debt consolidation loan works, read on.
How debt consolidation loans work
On the face, debt consolidation loans are actually pretty simple.
Say you’re dealing with a ton of different debt from multiple different creditors. Perhaps you had a family emergency or health scare and you needed to stretch the credit that was available to you in order to make ends meet. Or perhaps you couldn’t help yourself and wanted to try and live outside your means by opening and running up credit cards which soon got out of control.
Regardless of how you got there, the current situation is this: you’re in debt to a bunch of different creditors. Each month is a tightwire act. You’re allocating a huge chunk of your income to paying minimum payments on these different sources of debt, each with its own payment deadline, minimum amount, interest rate and eventual payoff date. It’s a stressful and financially taxing situation to be in and can often feel like there’s no end in sight.
And that’s the best case scenario. Say you get shorted on hours at work, or you suddenly lose or need to spend more money than you expected in a month and can’t keep up with all the bills that you owe to your creditors.
All of a sudden, you’re getting harassing phone calls and letters demanding that you pay up immediately and threatening action from legal entities and collections agencies if you don’t. Your credit score, already tested by your high use of credit, starts to go down even further as you continue to miss payments. It can feel like you’ll never catch up.
In a case like this, a debt consolidation loan can make a huge difference. With a debt consolidation loan, you take out a loan from a lender that allows you to pay off all of this debt from disparate creditors at once. Then, each month, you only have to deal with one payment instead of several different, smaller payments.
Not only that, but the loan may save you quite a bit of money over time. If that single loan payment is less than the total amount you were paying to all of your different creditors, then you’ll save money every single month that you can save or put towards paying off your debt even faster. And if the interest rate on your new debt consolidation loan actually leads to you paying less interest over time, you’ll spend less of your income on debt and more on things that actually matter.
While all of that can sound pretty attractive to an individual in debt to multiple different creditors, that doesn’t mean that debt consolidation loans are a perfect solution for everyone. Still, debt consolidation loans have been extremely helpful for a lot of people who have found themselves, often through no fault of their own, in extraordinarily high levels of debt.
How do you get a debt consolidation loan?
Finding a debt consolidation loan is often easier said than done.
To find a loan, you first need to find a lender that’s willing to lend to you. And if you’re deeply in debt, that can be difficult.
That’s because lenders often base their lending decisions on your credit score, which is meant to measure your creditworthiness. With a good credit score, it’s easier to get approved for a loan with acceptable terms and a decent interest rate. With a bad credit score, it can be difficult to get approved for a loan at all, much less one that you can actually afford to take on.
For better or for worse, the folks who tend to seek debt consolidation loans often don’t have very good credit. That’s usually because of two factors: late payments and their utilization ratio.
Late payments are self-explanatory. Being harassed by creditors because you’re falling behind on their payments is one of the reasons people often seek debt consolidation loans in the first place. Each late payment can drag down your credit score, making you less likely to get approved for your loan.
Utilization ratio is a little trickier. Basically, your utilization ratio is a measure of how much of your available credit you’re currently using. A high ratio can bring an individual’s credit score down over time, and if you’ve found yourself in a ton of debt to multiple different creditors, you probably have a high utilization ratio.
The worse your credit score is, the less likely it is that you’ll be approved for a decent, financially viable loan from a reputable lender. But that doesn’t mean it’s impossible. Still, you should know the difference between some of your options so you can make the right decision for you.
Secured vs. unsecured loans
If you’re researching your debt consolidation loan options, then you’ve probably heard about secured and unsecured loans. But you might not know what the difference is.
In general, the difference is collateral. Collateral is what you put on the line in order to secure your loan. With valuable collateral, your lender is more likely to approve your loan, since they know that if you are unable to keep up with your payments, they’ll still be able to recoup some of their losses by taking your collateral.
Common forms of collateral are homes, cars and other sizable assets that individuals can own.
With a secured loan, you’re putting up collateral so that the bank feels more comfortable lending to you. They may also be more willing to give you more favorable terms on your debt consolidation loan or lower interest rates since they know that their investment is more secure.
With unsecured loans, your lender does not ask that you put up collateral to receive your loan. Rather, they extend the offer for the loan to you based on your creditworthiness. Unsecured loans are less risky but tend to have less favorable interest rates and terms, since they’re often less attractive investments to lending organizations.
As you might imagine, it’s much more difficult to get an unsecured loan if you have bad credit. But in reality, it can feel almost impossible to get a debt consolidation loan period if your credit isn’t up to par.
In these situations, you have to be careful. That’s because disreputable, scammy debt consolidation companies prey on individuals without many options, and if you’re having a difficult time getting a debt consolidation loan from a lender that you trust, then that might be you.
How to identify disreputable debt consolidation companies
Disreputable debt consolidation companies make their money by scamming individuals who are already deeply in debt into parting with even more of their hard-earned money based on outlandish and empty promises of easy relief.
Their scam is simple. First, they draw you in by promising that they’ll be able to eliminate your debt extremely quickly and with a great deal of certainty, often at very little cost or with no real effort from you. These types of claims are almost impossible to consistently deliver on, and most reputable debt consolidation companies would never make these types of guarantees. Still, individuals in debt are desperate for accessible options, so they take the bait all too often.
Once the disreputable company has you on the hook, they get far less interested in how they can help you and far more interested in how much you can pay them. They’ll demand immediate payment of a fee before they’ll get started on helping you pay down your debt, often without taking much time to really get to know your individual situation.
That’s not to say that reputable debt consolidation companies won’t charge you some kind of fee in order to help you get out of debt. They just won’t make any impossible promises or guarantees, they’ll take some time to get to know you and they won’t pressure you into making any decisions that you aren’t truly comfortable with.
Once the disreputable debt consolidation company has your money, though, they’ll do next to nothing to actually help you get out of debt. Despite all of their promises and guarantees, they have no real incentive or ability to help you, and if you can get them to take your calls at all, they’ll be vague and hostile about the supposed progress they’re supposed to be making.
In short, they’ll have all of your money and you’ll have nothing to show for it except a slimmer bank account.
If you’re curious about if the debt consolidation company you’re researching is trustworthy or not, ask yourself a few questions.
First, are they pressuring you to pay a large upfront fee with nothing to show for it? While many trustworthy debt consolidation companies will charge a fee to help you out, they’re not going to try and pressure you and force you to pay a fee that you can’t afford for a service you’re not entirely sure you need. They should be available to answer any questions you might have to your complete satisfaction. After all, debt consolidation is a big decision.
Second, are they making promises that seem too good to be true? If so, they probably are too good to be true. While reputable companies often have pretty good track records helping individuals to get out of debt, they aren’t going to promise specific results, especially if those results are portrayed as requiring very little effort or investment on your part to achieve. If they’re making irresponsible promises, they’re probably trying to bamboozle you.
Third, are they willing to get to know you? Debt is a very personal thing and there are a lot of factors that go into an individual’s debt consolidation and repayment plan. There are no effective one-size-fits-all solutions. If your debt consolidation company doesn’t make an effort to get to know you, then they probably have no real intention of helping you at all.
Fourth and finally, what do other people say about the debt consolidation company? Google their name and scour the results for reputable, trustworthy information about them. Are there any news articles calling them out for deceptive practices? Does their Better Business Bureau profile list a number of unresolved complaints? Are there reviews from past clients on third-party websites that seem legitimate and give you some insight into how they do business? All of these sources can help you to get an idea of if your debt consolidation company is trustworthy or not.
If you’re interested in choosing National Debt Relief for your debt consolidation needs, we invite you to put us to the test. Research what we offer, browse our website and blog for more information and definitely check out our reviews to see if you feel like we’re a reputable company you might like to do business with. If you decide you’re interested, we’re happy to help. Just contact us today to get started!