What is Bill Consolidation?
In its simplest sense, bill consolidation involves taking out one large loan to
pay a number of smaller, usually high interest, loans. As a concept, it is
valuable for several reasons:
It allows a debtor to put all debt into one loan, usually with a smaller
monthly payment than he/she had with all of the separate loans/debts.
Most of the time, the interest rate on the new loan is less than the average
interest rate of the old loans/debts.
There is a convenience and peace of mind in knowing that only one payment needs
to be made to cover the multiple former debts.
The debtor usually feels much less stress and tension than before, when he/she
was trying to figure out which loans to pay during which pay period and
juggling minimum payments to a variety of creditors, all with different due
Types of Bill Consolidation
There are different methods available for bill consolidation. Certainly, the
most attractive method is to borrow from a relative who may charge little to no
interest. Unfortunately, most people do not have that "rich uncle" waiting in
the wings to perform the rescue, and more traditional methods must be used
for debt consolidation.
For those people with collateral (usually equity in a home), a home equity loan
may seem to be the best answer. With this method, the debtor takes out a loan
on his/her home and has regular monthly payments until the total loan is paid
off. Interest rates on these loans are usually adjustable and relatively
attractive, provided the debtor has a good credit score. For those without a
good credit score, however, they are unavailable. In addition, the home equity
loan is placed on the title of the property and, should the debtor fail to pay
this loan back, the property is in jeopardy of being taken. Anyone who
considers a home equity loan must be able to "bite the bullet" of no more
credit purchases, commit to living completely within his/her means from now on
(and this includes minimal shopping for holidays!), and be willing to establish
a budget within which he/she will definitely live until this equity loan is
paid off. Nothing can be quite as frightening as to know that your house is "on
An unsecured loan to consolidate one's bills is probably the least used. For
one thing, the borrower must have really good credit to qualify. Most people
who have gotten themselves in too deep do not have the credit score to get an
unsecured loan, and the interest rates are generally higher than a loan secured
by collateral. However, if credit is excellent and the borrower is ready to
"bite the bullet" of no additional debt acquisition, these can be an answer.
Interest rates are usually higher than a home equity loan but lower than the
credit card rates.
Again, people with good credit are often offered "zero interest" introductory
rates on other credit cards and can transfer high interest debt to these cards.
This can be a good avenue for debtors who are really vigilant. The introductory
rates expire, and then the debt is charged with the "going" interest rate, and
that can be quite hefty. Before anyone considers this method, he/she must
commit to being careful about watching for the end of the introductory rate, in
the hopes that another credit card company will offer a "zero interest" rate,
to which the balance may be transferred. The other thing about these constant
switches is that they can and do affect one's credit score. Taking out too many
new credit cards within a short period of time can cause a score to drop
significantly. And, if the debtor keeps the old credit cards, with the higher
interest rates, the temptation is always there to use them on impulse buying.
The third and frequently used method is to contact a bill consolidation
professional who can take all of the debtor's information and debt and develop
a plan to pay it off in a comfortable way. The debt consolidator may set up a
new loan, at a lower average interest rate, reducing all debt to one more
comfortable monthly payment and, in addition, may negotiate with current
creditors to reduce the total debt amount, allowing a debtor to get out of debt
sooner. Again, personal responsibility is required. The debtor must be willing
to cut up any credit cards included in the bill consolidation loan, perhaps
maintaining any that are at low interest or have zero balances - to be used in
emergencies only, please! Anyone who is inexperienced in negotiation with
creditors or who is just too embarrassed or stressed to tackle this often
complex task on his/her own, is wise to use a professional, provided the terms
of the contract/agreement are appropriate. People don't work for free, and the
debt consolidator has to pay his bills too! There will be a fee for this
service, paid by addition to your overall payments or by the creditors with
whom the consolidator is working. Either way, the bill consolidator gets paid