There are many different types of programs designed to help consumers pay down out of control debt. The available options range from simple counseling to full-blown institutions that attempt to negotiate with the banks.
Loan modification and debt management agencies contact the creditors and try to work out some type of deal in order to reduce the actual amount of the loan. While this can be helpful since it will reduce the amount that is owed, it will reflect negatively on your credit report.
Debt consolidation services do not contact the lending institutions directly. They do not negotiate. The only thing a consolidation service does is tally up the debts, asses the risks, and issue loans to the consumer to cover the cost of paying off bills immediately.
There is no reduction in the amount owed from using this type of program. You will have to pay the exact total requested. However, there are two other important points to consider.
The first is interest. There is a chance that the combined interest on all of the debts may actually be higher then the interest on the single consolidation loan. Ultimately, this means that the amount paid to the service will be less than what would have been paid to the creditors.
The second point is the savings on peripheral charges. If part of the debt incurred included mounting late fees or penalty charges, then you will stop accruing these expenses once the creditors are paid. If payments on the new loan are made in a timely fashion, then this can add up to some very large savings over the amount that might have been owed.
In conclusion, debt consolidation services do not reduce the principle amount owed to lenders. They do offer the opportunity to reduce some of the associated charges, and that could save you money in the long run.
