When people explore ways to rid themselves of debt, they often come across debt consolidation companies. These firms seem to be popping up more frequently since the financial crisis, a testament to how many consumers have been affected by the economy.

Consumers should understand how things will work should they seek debt consolidation advice from one of these firms.

Though the exact process used by debt consolidation companies may differ, here is the general procedure. Once a customer agrees to do business with the firm, a negotiation period commences.

During this time, the consolidation company reaches out to each creditor in an attempt to reduce the monthly payment amount or outstanding balance. This stage typically takes between three and five weeks. The client does not issue payments during this time, which can cause problems if accounts become past-due.

Many debt consolidation companies offer debt consolidation loans, through either themselves or an affiliated party. The lender monitors debt payments under the program, allocates the appropriate amount for each creditor, and distributes the money appropriately.

Consolidation loan interest rates are typically between 12 and 15 percent. Though this is higher than the rate for most personal loans, it is less than the APR on most credit cards.

Debt consolidation companies may provide unsecured and secured debt consolidation loans with fixed or variable rates of interest. A secured loan is backed by an asset of the borrower, such as an automobile or home.

If the borrower defaults on the loan, the lender can repossess the asset and sell it to recoup the money it is owed. Unsecured debt consolidation loans are backed only by a promise to pay, so they usually feature a higher interest rate.

With a fixed interest rate, the loan payment is the same each month, while the monthly payment for a variable interest rate loan fluctuates with the market.

An important note pertains to how debt consolidation companies handle initial loan payments. In some cases, the first payment covers the cost to run and monitor the credit report, establish the loan account, and pay lending fees and closing costs.

Payment to creditors usually begins with the second payment. Consumers should be aware that not all creditors post these payments in a timely manner, due to understaffed collections departments. This can result in payments being unapplied until the late payment period has begun.

Firms engaging in debt settlement are highly regulated by the UK Office of Fair Trading. This agency publishes detailed guidance for entities that hold consumer credit licenses. The OFT also oversees their practices, as many issues have been brought to its attention.

Since 2008, the OFT has been subjecting these companies to greater scrutiny during the license application process.

Consumers should compare debt consolidation companies to find one with a good reputation and the most affordable rates for debt consolidation loans. Those who do not wish to pay for debt consolidation advice should approach the Consumer Credit Counselling Service, National Debtline, or Citizens Advice Bureau.

These entities provide free consultations and connect consumers with low-cost lenders.

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