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Things You Should Know About Debt Consolidated Loans

February 17th, 2009

Yesterday I managed to pick up a pack of 10 articles on the topic of debt consolidation from a Canadian writer posting as “x_master” on the DigitalPoint forums. Since this is a popular topic for our debt-ridden American consumer culture (not to mention a very high value AdSense keyword), this looked like a pretty good deal. This particular article discusses the differences between debt consolidation programs and ordinary personal loans while not surprisingly mentioning that the former is more of a long term solution.

Recently I came across a website which was rambling about debt consolidated loans without understanding the true meaning of debt consolidation in this context. Such websites not only misguide people but also give people a false sense of security. These websites described debt consolidation as being similar to taking a personal loan and paying the creditors. Even though taking a personal loan to pay back your creditors may be a good option for some individuals, for others it may just be a form of delaying the inevitable.

A personal loan may be used as a temporary solution in some cases, but cannot be used as a tool to get over your situation if you have long term financial problems. In a personal loan you apply for certain amounts of money which you will receive once it is approved. The money so received can be used to pay the creditors to clear your outstanding debts. This method can be used if the amount payable to creditors is small, but it becomes completely ineffective if the amount that you need to repay is huge.

Debt consolidation on the other hand is an entirely different concept. Here you do not receive payment from any single company to pay off your debt. It is actually a combination of a personal loan and a bankruptcy program. It is not entirely a personal loan because in debt consolidation you do not receive any amount of money to pay your creditors. Also, this type of strategy is used as a permanent solution to the problem, which is not the case in a personal loan.

Meanwhile, it is not entirely a bankruptcy program either because when you consolidate your debts in this way, you merely negotiate with the lenders without actually declaring bankruptcy. While this strategy is viewed as a way of finding a solution to the problem, bankruptcy is effectively just running away from your problems by defaulting on all or part of your liabilities to creditors.

When you join a debt consolidation program, you will have to make a single payment to the debt consolidation company, which in turn pays your creditors. Your burden is considerably reduced because instead of making payments to many different creditors, you only need to make payment to a single entity.

Debt consolidation companies also help in reducing the rate of interest that you pay to creditors. They may also help in reducing your monthly payments and may even be able to reduce the penalties that you would ordinarily pay due to late payment fees. Debt consolidation companies have helped certain individuals in reducing the monthly payments by over 30%. This “extra” money that you save will give you financial breathing room and help you in getting your financial act together.

The last and the most important point that you need to understand is that the debt consolidation companies do not pay your debt by themselves nor do they give you payment to repay your debt. They merely act as intermediaries to pay off your outstanding liabilities. The amount that you pay to them is used to pay your creditors, which means that if you do not pay them on time, your creditors will not be paid on time either. Therefore it is in your interest to see that your payment reaches your favorite debt consolidation company on time.

Take note of the points I have mentioned and join a debt consolidation program only after you have clearly understood its terms and conditions.

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