Debt consolidation services assist those struggling to make monthly debt payments by combining their outstanding debt into a single loan or by combining existing monthly debt payments into one payment. The goal of both methods is to pay down debt through disciplined, credit-restoring monthly payments that are lowered to a more manageable level for the debtor.

Another premise of debt consolidation services is to lower the amount of principal and interest a debtor will have to pay out over time. The two debt consolidation methods achieve this in different ways.

Loan Consolidation

In the first method the debt consolidation company pays off a client's outstanding debts by giving the client a new loan in the amount of the outstanding debt. The idea is that the new loan has a lower interest rate than the outstanding debt, so the client's monthly payment and the total amount payable over time are lower than the original debt.

The client never has access to the money from the loan. Instead, the debt consolidator pays off the creditors through “two party checks.” These are checks made out by the debt consolidator directly to each of the creditors a client is paying off. This is a safety measure, ensuring the client does not use the new funds for purposes other than paying off outstanding debt.

It may not be worthwhile to include all of someone's debt in a consolidation. This is true when the terms of an original debt are better than those offered by the consolidation loan. For example, if an outstanding balance has a lower interest rate than the consolidation loan, continuing to pay that creditor directly makes more sense than adding that balance to a new loan with a higher interest rate. After all, paying more on even a portion of outstanding debt defeats the ultimate purpose of loan consolidation

Consolidating Monthly Payments

The second type of debt consolidation service is for clients who cannot get a consolidation loan or cannot get terms that make such a loan a good financial move. Damaged credit scores are the primary reason why someone would not be able to get a loan or loan terms that are workable. This is probably the case for most people seeking debt consolidation services.

In these situations, debt consolidation companies take a different tack. Clients make a single monthly payment to the debt consolidation company, which then pays the client's creditors. To lower the amount of the monthly payment, the debt consolidator negotiates with the client's creditors.

By negotiating on behalf of their clients, debt consolidation companies try to get creditors to accept a lower monthly payment and adjust the terms of the debt. If all or enough of the creditors agree, the client ends up with a lower, more manageable monthly payment.

If creditors do not agree to lower terms and the monthly payment to them from the debt consolidator still drops, clients may find themselves in hot water. It's critical to keep in mind that debt consolidation services will not necessarily prevent creditors from going after debtors. Even if a debtor is making some kind of monthly payment through the debt consolidation company, creditors can still try to make themselves whole through use of collection agencies, credit judgments, and sometimes even forcing a bankruptcy filing.

Why Creditors Agree to Lower Payments

Some creditors are eager to keep money coming in because it's better to have regular paying customers on the books. Others may want to maintain a relationship with the debtor over the long term and refusing a to accept a lower payment might alienate them. Finally, some would rather have a customer pay something than nothing at all.

Why Creditors Refuse to Negotiate

Some lenders would rather work through collection agencies even when it means they will ultimately receive less money than they would through lower payments from the debtor. The reason is that turning things over to a third party relieves the creditor of having to try to chase down the debtors. This is particularly the case with unsecured debt, like credit cards.

Credit card companies have usually long since broken even on their loans to borrowers and have no interest in maintaining a relationship. So using collection agencies or initiating legal action against debtors is easier and more cost effective under their calculations.

What Debt Consolidation Services Can Do For You

Debt consolidation companies can be extremely helpful in getting people back on their feet financially. Most are very aware of the laws and regulations and can work with clients to help them control costs and make monthly debt payments more manageable.

For many people, just having a debt consolidation service take care of making payments regularly and on time helps relieve anxiety and stress. At the same time, consistent payments made by the due date can help improve an individual's credit rating.

Some debt consolidation services have flexibility to help clients succeed in making payments. These can include accommodating a preferred payment date to coincide with a paycheck schedule or will extend the amount of time to repayment to lower monthly payments or grant an extension if the client needs an extra day to make a payment.