Debt consolidation is often disparaged by those who have never had to do it themselves. The truth of the matter is that the relief the debtor gets is immense, and it is both real (as in financial) and psychological. Here's a brief overview of the possible ways to get it done, along with the benefits therein.
The basic concept is to take out a single and low interest loan to pay off many different loans. Apart from the lower interest, it is also easier to handle a single creditor and the charges and formalities associated, as opposed to multiple creditors. The question, of course, is whether or not the debtor can get a single loan large enough with a lower interest rate.
What usually happens is that some people spend too much using many credit cards and then are unable to pay it back. When this happens, it becomes easier to use some sort of collateral and get a secured loan, such as a mortgage against the debtor's home. Compared to multiple credit card payments, this single fixed-rate home loan is much easier to repay with a longer term and smaller monthly payments.
Many times, such a simple solution may not be possible because the debtor may not have the necessary assets or credit history required to get a low interest and secured loan. In this case, there are two other possible solutions. Both involve getting outside help, from debt consolidation companies that can be non-profit organizations or commercial operators.
The first method is to contact one of the many non profits who provide counseling and assistance in this matter. They will provide a free counseling session and then help the debtor prepare a financial balance sheet listing the debtor's income and expenses. Based on how much the debtor has left over to pay for the loans every month, they will renegotiate a monthly payment plan with all creditors.
It is the non-profit's duty to negotiate and make sure the amount the debtor can pay is enough to distribute as negotiated with all creditors. As far as the debtor is concerned, it's a single monthly payment that has to be paid. This is again sometimes not possible, because the creditors may not agree to the reduced monthly payment.
This is where the second option kicks in, involving for-profit consolidators. These companies will agree to buy the loans at a discount. In essence, they let the debtor off the hook in return for a certain amount that is less than the amount the debtor has to pay to all the creditors combined. The consolidator then convinces the creditors to agree to settle at an even smaller amount, and gets to pocket the difference.
All said and done, debt consolidation is a good way to get a grip on loans and spending before it gets out of hand. The point here is that consolidating loans provides the debtor with instant relief and psychological motivation. The debtor starts meeting payments and slowly reduces the net amount of debt.
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