Example of How Debt Consolidation Companies Work: Helping Out the Joneses

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Debt consolidation companies vary in how they consolidate your debt. However, most of them will offer you a secured or secured loan if they are able to get your debtors to cooperate.

Debt consolidation companies contact your creditors directly and ask them to lower or stop interest payments. Some creditors will work with loan consolidation companies. Some will not.

If you receive a secured loan from a debt consolidation company, this means your interest rate is probably lower. It also means you had to mortgage your home. Still, when circumstances call for it, a debt consolidation loan has been known to help people who are heavily in debt.

An example debt consolidation:

Mr. and Mrs. Jones have $15,000 in credit card debt and a mortgage on their home. Although they have stopped using their credit cards, they are unable to pay more than the minimum amount each month. As a result, none of their payments are going toward principal. Mrs. Jones anticipates a decrease in her work hours in the next few weeks. They need to do something to take care of their debt. With little in retirement savings, they are not willing to consider bankruptcy until they have exhausted their options.

They choose to consolidate their debts by obtaining a consolidation loan from a reputable company. They use their home as collateral for the loan.
The debt consolidation company is able to get 7 of their creditors to lower their interest rates. They covered the Jones' debt and now have taken over as creditor.

The bill reflects a $400 savings every month. At this rate, they will pay more than they would have paid over a longer period. But because the debt consolidation company offers credit counseling, the Joneses are paying an extra $150 a month to take more out of the principal. They have reduced their spending in other areas of their life as well.

As stated before, all debt consolidation companies are not equal. Before you go this route, be sure to find out all you can about every company you look at. Read reviews about them and ask people who have worked with them for their opinions. The company you pick should offer credit counseling to help you stay debt free after satisfying your debt.