Finding out about the pros and cons of debt consolidation can be a tricky business, because the vast majority of information you will find on the internet is by companies that want to provide the service for you, so they have a vested interest in only stressing the advantages. This article will not only explain exactly how the process works, but inform you of the possible disadvantages as well as the more obvious advantages.

Like anything else, debt consolidation has pros and cons and it is important to have the full picture before deciding whether it is the right option for you. It is a solution that works extremely well for people in certain situations who use a good company to help them. If you do not understand how it works or you seek help from a disreputable or ineffective company, you can actually end up worse off than before you started the process.

Before going any further it is worth just confirmation what debt consolidation is, because the term is used to mean more than one thing and is sometimes used incorrectly. Debt consolidation is when you put arrangements in place that result in you not having to pay lots of creditors and instead you make one smaller payment to a single company. There are two ways of achieving this. One is by taking out a big loan to pay off all your existing debts, and the other is to use a debt management plan.

Taking out a loan is only the best option in a very limited number of cases, so I am not going to discuss that in this article. For most people, the last thing you need when you are in debt is another debt. Debt management plans do not involve any borrowing and they are entirely focussed on reducing the amount you pay in interest and other charges, in order to bring down the amount you pay each month.

With a debt management plan a company negotiates with your creditors to set up new conditions for the repayment of your debts. The new terms usually mean reduced interest charges and often the waiving or writing off of any late payment fees or penalties. The company then deal with your creditors and pay them direct, while you just make one monthly payment to the company.

The main debt consolidation pros are not difficult to come by, as they are repeated on the thousands of websites that offer to undertake this process for you, but here are the main ones.

Debt Consolidation Pros:

Your interest charges go down and the amount you have to pay out each month for your debts will be less than you currently pay.

You only have a single payment to think about.

Your creditors stop bothering you for money.

Debt management plans are informal and flexile, so you can stop the plan or change it if your circumstances change.

You can get help from the debt management company with the preparation of your financial statement, and often ongoing help with budgeting and financial planning.

The following are some of the debt consolidation cons, or possible drawbacks, that you have to be aware of when you are thinking of using this solution.

Debt Consolidation Cons:

The fact that it is an informal agreement means that your creditors cannot be forced to take part.

Not all debt management companies are equal and you could end up worse off if you get involved with a disreputable or incompetent company. Always shop around and apply to a few different organisations.

You can only include unsecured debts in a plan, so you cannot include things like your mortgage or other secured loan.

Debt management plans are only viable if you have a steady source of income that will leave you enough spare every month to put towards the plan payment.

You have to have a certain amount of debt and it has to be to several different creditors. You cannot use a plan for a large debt to only one company.

When you are familiar with all the debt consolidation pros and cons you are in a much better position to decide whether it is likely to be the right solution to your situation or not. If you do decide to look into it, you can apply to a few different companies very quickly and easily online. The best ones have quite simple online forms that you submit, following which they get back to you by telephone to go through things in more detail. All the major companies work in this way, so you do not need to worry about where your company is located, provided they are operating in your country of residence.

The safest way to identify good companies is to follow recommendations for reputable and well established organisations and apply to at least three of them. You then have time to compare what they offer you and make a decision about which, if any, you think offers best value.

Author's Bio: 

Read reviews and recommendations for the best debt management companies in the US and UK. K D Garrow has worked as a senior manager with significant financial responsibility for the last twenty years. His website offers free help with Debt, including advice on debt settlement, debt consolidation loans, IVAs, payday loans, bankruptcy and budgeting.