The economic crunch seems to be ever tighter as unemployment rates skyrocket and credit scores bottom out. In these trying times, when a dollar is hard to make and that dollar can only buy so little, people are looking for new ways to manage their finances and credit. Financial institutions such as banks and credit unions have devised a number of financial tools and products to help people get a hold of their financial status and repair their credit scores. One of the financial tools that has become quite popular as a result of the economic crisis is debt consolidation. If you are looking for a way to manage your debts, you may want to consider getting a good debt consolidation plan. This article will cover the basics of debt consolidation and how it works.

The basics of debt consolidation

Before we get into all the details, let's take a look at the term "debt consolidation." From the term alone, you can already get an idea of what kind of financial tool this is. Basically, debt consolidation plans allow you to combine the costs of multiple loans under a single loan. Let us say, for example, that you have credit debt on multiple credit cards. Now, credit debt can be quite difficult to deal with because of the high interest rates that are charged on credit debt. You can get a debt consolidation plan that will pay off your existing credit debts, leaving you with a single debt instead of the numerous debts that you had. Some debt consolidation plans can be tied to your home or other forms of collateral, depending on the consolidation plan and your agreement with the consolidator.

Benefits of debt consolidation

Typically, there are three beneficial reasons that might entice you to try out a debt consolidation plan. First is that it makes your debts easier to manage. By getting a debt consolidation plan, you can rid yourself of the hassle of having to monitor and pay of numerous debts. Instead of making an intricate plan to pay off each and every debt that you have, you can get a good consolidation plan so you will only be left with one.

Another advantage of debt consolidation is that it can offer lower interest rates than the debts that you currently have. This is perhaps the most popular reason for people to go for consolidation plans. In many cases, your debt consolidation lender will be able to pay off your loans at a negotiated, lower price, making it easier for the lender to offer you a lower interest rate. Usually, debt consolidation plans that include some form of collateral on your part will result in lower interest rates. This is simply because the lender is at a lesser risk, since the collateral will cover the costs of the loan in case you aren't able to pay it off yourself.

The third benefit that may entice consumers to consider debt consolidation is having fixed interest rate on their loans. When you have multiple debts with various lenders or creditors, it can be confusing to keep track of all the interest rates. Some interest rates may be higher than others, which makes it difficult to manage your debts. Instead of having to deal with multiple, varying interest rates, the debt consolidation plan can offer you a fixed interest rate that is easier to understand and pay off.

Aside from the benefits mentioned above, here are a few more benefits of debt consolidation:

* Debt consolidation plans can make it easier for you to get out of debt. The main goal here is not just to get you a better loan, but also to make it easier for you to pay off your debts and improve your credit report. Regular debts can take decades to pay off, but with a good debt consolidation plan you can get rid of your debt within four to six years.

* You can also get free debt counseling when you talk with a debt consolidation company. Most of the consolidation companies out there offer some sort of financial debt counseling to help you analyze your situation and find the best way to reduce your debts. Not only will this help you make an educated decision on whether or not to consolidate, but it will also help you understand the "big picture" of your finances.

Terms you need to know when doing debt consolidation

In order to make the most of your debt consolidation plan, it's essential for you to understand the many terms that are used when discussing and formulating your consolidation plan. Making negotiations for better debt consolidation rates has a lot to do with how well you know your finances. Here is a short list of some of the most commonly used terms when dealing with debt consolidation:

Unsecured debt - Basically, an unsecured debt is a debt that does not involve any form of collateral. Credit card debt is a common form of unsecured debt. In most cases, unsecured debts have higher interest rates. Debts that do involve some form of collateral are called secured debts.

Collateral - Collateral is an item that is included in the loan plan as a guarantee that your debts will be paid off. If you are unable to meet your payments, you can face a situation in which the lender takes ownership of the collateral.

Interest rate - The interest rate is a certain percentage that the lender charges on the amount of money that you borrow.

Dischargeable and non-dischargeable debt - Dischargeable debts are eliminated once you file bankruptcy. Debts that remain regardless of filing bankruptcy are referred to as non-dischargeable debts.

Co-signer - If the original borrower defaults on a loan, the co-signer on the contract is officially responsible for dealing with the loan.

With all the listed advantages, you may want to push through with your consolidation plan, especially in times of recession when you need to be smarter with managing your finances. Understanding what debt consolidation is all about is just the first step. Yous still need to shop around for better deals, deals that will help you eliminate debt in less time with the money you have.