Individuals trying to get financially back on track usually consider some form of debt consolidation. There are three main ways to consolidate debt: Debt Consolidation Loan, Debt Management Program, and Debt Settlement.
Let’s start with a debt consolidation loan. This involves getting a loan from one lender with the purpose of paying off multiple creditors. For instance, a person with 15 monthly bills will apply for a loan. The 15 bills will be paid off using the money from the new loan. In exchange, the individual will pay the new lender every month.
There are some advantages with a debt consolidation loan. For example, there is one lender instead of a group of lenders to pay. However, there are many things a person should be aware of before obtaining a debt consolidation loan. It really does NOT eliminate debt. The loan just shifts the debt from a group of lenders to one lender. It’s usually not a good idea to try and pay off debt with another form of debt.
The credit card accounts will show no balance which may tempt a person to start accumulating debt again (on top of the debt consolidation loan). It may take longer for the debts to be paid because of the extended payment. If the individual defaults on the loan, he or she could lose the collateral that was pledged. For instance, with a second mortgage, that individual could lose their house because of secured debts not being paid back. There are unsecured debt consolidation loans available that do not require any collateral. However, they usually have very high interest rates or finance charges.
Debt Consolidation Program –
A simple debt consolidation program (a.k.a. debt management program) involves consolidating multiple bills into one single monthly payment through the use of a non-profit credit counseling agency. The individual pays one monthly payment to the credit counseling agency, and the agency then distributes the money to the various creditors. The individual does not apply for any loan. Instead, he or she enrolls in a debt management program to work on paying off the debt that they owe in as little as 3 years.
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There are more advantages to bundling debts together and paying them off, then there are with just shifting debt from one place to another. For example, there is no additional debt because there is no new loan. There is no collateral to put up in order to consolidate debts. The monthly payment is typically lower than a new loan payment. There is less chance for an individual to rack up new debt on credit cards.
Debt Settlement –
There are also debt settlement programs out there, but they should be thoroughly researched and carefully considered before getting involved in debt settlement. For instance, with debt settlement programs, it can have a negative impact on a credit score. Also, enrolling in any debt settlement program may limit your ability to seek new credit. These two disadvantages with debt settlement may deter someone from signing up with a debt settlement company. It’s a good idea to do some extensive research about debt settlement before you make that leap. You may also be responsible for paying taxes on the amount of debt that was forgiven. Make sure you find out about that if you are thinking about settling your debt.
Qualifying for Debt Consolidation –
To apply for a debt consolidation loan, a person should have some sort of collateral such as home equity in a home and show income stability. This can include living in the same place for at least two years, having some form of income, and having good credit. To qualify for a debt consolidation program, a person must have a specific amount of debt to consolidate. He or she usually must have at least two creditors to repay. Also, that individual must have a source of steady income to repay the unsecured debts.
A lot of research should go into consolidating debts. If a person chooses the wrong option, he or she may end up owing more money or losing collateral. Therefore, it’s important to figure out which option is best for you.
What a person needs to know about a debt consolidation loan is that it involves shifting debt from one place to another. The second option is to pay the debts off each month using the help of a debt management program from a reputable Non-Profit Credit Counseling agency. And the third less desirable option is to settle your debts through a debt settlement plan, which may hurt your credit score, cost you money when paying your taxes, and make it really difficult for you to obtain any new credit. All creditors and lenders will be able to see that you settled your debt and paid LESS than the agreed upon amount. That does not look good to any creditor or lender.
What are your thoughts on debt consolidation and have you tried any of these methods in the past? Share your story in the comment section below!
