Debt consolidation is a process where a new loan is taken to repay numerous liabilities and consumer debts. It results in the generation of a large piece of debt, though the terms may be more favorable in nature. Such a loan is expected to carry a lower interest rate or a lower equated monthly installment or both may exist at the same time.

Types of debt consolidation
Basically, debt consolidation is of two types. The first type requires the debtor to apply for and receive the loan in order to replace all the previous debts and bills. In this case, the past creditors are paid and the debtors would owe a monthly payment for repayment of the new accredited balance with the consolidation company that has extended the new credit.

The other type involves generating a debt management program. In this case, an account is created to chart all the debts accrued to current creditors. This helps the managing company pay all the debts and credit the sum repaid in the account of the enlisted debtor.

Debt management program
This is one of the most advanced methods of debt reconciliation where an account is created in the name of the debtor where the balances owed to several creditors are recorded. Before commencement of the payment procedure, a credit counseling agency negotiates with the creditors with a plea to reduce interest rate and settle manageable monthly payments. After settling the total amount, it is withdrawn from the personal account of a client as a single monthly payment. The payment is then made to all the creditors enlisted in that account. The client enjoys the facility to consolidate multiple payments to creditors.

Options for debt consolidation

Debt settlement: Companies carrying out debt settlement services negotiate with creditors in order to reduce the amount of total balance. The debtor may thus feel relieved as the total amount is lesser than the previous amount. However, the amount of savings may be feared to be equal to the fees these companies charge for their services. It may also be feared that the additional fees charged by these companies may make the debtor pay an equal amount to the earlier debt.

Balance transfer card: This option offers short-term relief when the amount of debt is low. Through the transfer of debts to these cards, the debtor becomes successful in draining the current high rate of interest for 0% APR for a previously set time. Sometimes, such a service is also paid. This provides him with a time to pay off debt prior to being subjected to pay an interest rate equal to or greater than the existing one. These cards are helpful in reducing the amount of interest but it is not helpful in reducing the current debt balance.

Bankruptcy: This method helps individuals be free of oppressive debts and start afresh. This type of reconsolidation leaves a major mark in the credit history of the person suffering from debt. A noteworthy number of bankruptcy filers are often seen to file second bankruptcy. This is mainly due to their unchanged behavior and the mode of spending. Student loans are also cleared through bankruptcy. But, by all means, this should be the last option and is thus not recommended at all.

People seek the refuge of debt management programs when they are deeply rooted in financial problems. Debt management charges hefty charges for helping these people and people are left without saving any bucks, if not paid in excess.