Debt Consolidation can often be confused as Credit Counseling or Debt Management; however, to accurately describe it, it’s the process of taking multiple debts, and combining them into one single monthly payment. For example, say you owe three different credit cards $3,000 each. If you get a $9,000 loan from your bank that pays off all three credit card debts, leaving you with one debt of $9,000, you have truly consolidated your debt. You no longer owe your three original creditors, having consolidated them into one debt you now owe to your bank.
Similarly, homeowners were able to consolidate debt on their personal loans with the help of refinancing their property. However, if you borrow from your equity in your home, either through a cash-out refinance or a second mortgage, and pay off the three credit cards, you will still owe the same principle amount and will now be paying for 20-30 years depending on the terms of your new home loan.
In other words, your three original creditors may have been paid off and your debt is consolidated but now your mortgage payment may have increased depending on the terms. Choosing this kind of debt reduction service can turn out to be not beneficial for every individual.
Although one way of dealing with your situation is to consolidate your bills into one monthly payment by borrowing from a lender, if you are behind in your payments and your credit score has suffered, it may not be possible for you to get a consolidation loan at an interest rate that will result in lower payments; or even get one at all.
Depending on your financial situation, getting a consolidation loan at an affordable interest rate could be a problem or a temporary solution at best. With no actual savings on the principle amount of debt, you could still be paying the new consolidated loan over a period of 10-20 years!
