Debt Consolidation FAQ

What exactly is debt consolidation?
Debt consolidation is simply taking out one loan to pay off lots of other loans that usually have higher interest rates. Typically debt consolidation loans are a secured loan, meaning an asset from the borrower is held by the lender as collateral. 

Can debt consolidation reduce the amount of my debt?
In some cases, debt consolidation companies can buy the debt from the collection companies at a significant savings from the original amount. The actual specifics of how much they can save you depend upon your individual situation.

What kind of collateral do debt consolidators usually require?
It varies from company to company, but typically a debtor will offer his or her home or car as collateral for the debt consolidation loan. This allows for the debt consolidation company to offer the debtor a much lower interest rate, because the lender is taking less risk, because the loan is back up by assets.

When is debt consolidation a good option?
Debt consolidation is an advisable option when the debtor has a lot of high interest debt, such as credit cards. By consolidating the unsecured debt and transferring it into secured debt, the debtor can potentially save a lot of money in both interest and principal.

Does debt consolidation also cover student loans?
In the United States, federal student loans have a consolidation process that differs slightly from conventional debt. The student loan is first purchased and closed by a loan consolidation company. The interest rates stay the same and the lender makes no direct money off of the borrower; instead they reap benefits and subsidiaries from the federal government.

Will debt consolidation rebuild my credit?
If the term of the debt consolidation loan is completed successfully and there have been no credit violations or delinquencies, you credit will definitely be better than it was to begin with, and your credit will start to build up again. How much better it will get depends on how bad it was before you consolidated.

How do I find out what's on my credit report?
By law the credit reporting bureaus have to provide you with a copy of your credit report once a year, for free, if you request it. This report will give you a list of everyone who has requested your report and your account information, including: outstanding debts, your identification and employment information, and any public record information (such as bankruptcies, tax liens, or foreclosures).

Will a debt consolidation program keep creditors from bothering me?
Most debt consolidation programs will have someone to whom you can direct the creditor; as your debt consolidation specialists work things out with the creditors, eventually they will stop calling.

Will debt consolidation solve all my financial problems?
It depends on who you are and your situation. For some people, debt consolidation is an excellent option; for others, it may not be the correct choice. So how do you decide? Talk to a professional or someone with experience and review your options. There are also lots of excellent resources online that go in to depth, as well as testimonials from both happy and disgruntled veterans of debt consolidation.