Debt consolidation loans involve the process of consolidating a person's multiple debts into one neatly wrapped loan, with lower interest rate and lower monthly repayment amount.
This loan can either be in the form of a home equity loan or a personal loan with no collateral.
The main purpose of obtaining this loan is to enjoy a lower interest rate.
This specific loan works best when a person is knee deep in credit card debt.
This is because the interest rates of the cards are always much higher.
By gathering all the debts into one single loan, you will be able to manage your debt repayment in an easier manner.
Nowadays, many debtors are looking for the assistance from the debt management firms or debt consolidation companies.
These service providers do not loan money.
Their main function is to negotiate with your creditors on your behalf to request for debt reduction.
They usually request the creditors to reduce or freeze the interest rates.
Some may even deal with the creditors to consolidate the debts into one low fixed-rate loan.
Once the creditors have agreed to reduce the interest, the financial consultants then assist their clients to create an affordable repayment schedule based on their clients' financial ability.
The monthly repayment amount is always more affordable and manageable.
The debtors are required to pay the service providers each month.
The firms will disburse the payments accordingly to each creditor.
By getting such services from the reliable firms, the debtors are able to eliminate their outstanding balances systematically and yet they are able to enjoy lower interest rates.
In short, debt consolidation loan can be considered a better alternative for people who intend to file bankruptcy.
It doesn't affect the credit rating so much.