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Rolling up your debts

• The credit card bills are piling up, the interest rate has risen on your mortgage and you are behind on your car loan. In fact you owe more money than you can make in a decade, let alone a year. What do you do?

  The answer for increasing numbers of people is to try to consolidate their debt by rolling all their monthly bills into one, usually at a lower rate of interest, in order to be able to afford the payments. Many banks offer debt consolidation services and there are numerous companies dedicated to debt renegotiation – for a fee or a percentage on payments.  

  Debt consolidation companies are very careful to emphasize that they don’t make your debts vanish, only tolerable by helping you dig yourself out of the hole you have put yourself in.

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• A new loan to pay off the lenders

• In most cases the debt consolidation process involves finding a way to lower the overall interest you are paying on your different liabilities. For example, a common process is to roll high-interest unsecured loans into a secured loan, such as a home equity loan, in order to bring down the interest the borrower pays and allow them to service their debts in a single monthly payment. This is an especially useful tactic in the case of debts built up on credit cards which almost always apply very high interest rates. By taking out a secured loan in which the lender has something to use as collateral, i.e. they can repossess your home should you not repay them, their risks are lowered and therefore so too is the interest they apply.

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• Your debt for sale at a discount

• A more radical form of debt consolidation can take place when someone is on the verge of bankruptcy. In that case, debt consolidators may be able to buy the debtors outstanding debt at a discount from their banks or credit card companies, shaving money not only off the interest but also off the capital. Debt consolidators will then pass some of those savings onto the borrower.

• In most cases, debt consolidators will charge high fees for their services, but by shopping around it is possible to find the best deal that, while not eliminating the financial pressure, will at least alleviate it to a degree.