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How Debt Consolidation Works

Debt consolidation is one of the most effective way to get out of debt in the current volatile economic environment. As a matter of fact, many people who have only thought of options like bankruptcy are actually able to be helped quite frequently with debt consolidation. However, you must make sure that you partner with the right company, and that means knowing a little bit about how debt consolidation actually works to reduce your debt load.

The first thing that a debt consolidation company will attempt to do is make sure that you only have to deal with one payment instead of many. This is where the word consolidation comes from - your many debts will be consolidated down into one. This gives the psychological advantage of only having to deal with one bill, and can also give financial advantage depending on what creditors are willing to help consolidate your loan for you.

One of the most popular types of debt consolidation loans is known as a second mortgage. This is a secured type of debt consolidation loan in which the creditor will take on your debts as long as you secure the payments with your real estate. For this, you will more than likely get a reduction in your interest rate, a longer period of time to actually pay the loan off, or possibly a bit of debt forgiveness depending on your situation. However, if you do not pay the loan back, the new creditor will be able to foreclose on your real estate.

There are other ways of consolidating debts other than securitizing the loan with a second mortgage. Many times, a debt consolidation company will simply consolidate your debts with the new creditor in an unsecured way, meaning that you do not have to put up any type of large asset to get them to take on the debt. This is known as an unsecured debt consolidation loan, and usually requires a higher credit score than secured consolidation loan.

Nevertheless, the idea is the same. You are taking many debts, consolidating them into one debt, finding a new creditor to take the debt at a lower interest rate, and passing the savings along to you, so that you can pay back the debt within a monthly budget. You might have to take a hit on your credit report because of this, although that is not set in stone by any means.
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