There are two kinds of debt consolidation. One type requires you to apply for and receive a consolidation loan to replace all past debts and bills. Your past creditors will be paid and you will now owe a monthly payment to repay your new balance with the consolidation company who supplied your loan.
The other type is carried out through a debt management program. In this scenario, an account will be created to keep track of all the balances owed to current creditors. Prior to beginning repayment, a credit counseling agency will negotiate with creditors to reduce interest rates and settle on manageable monthly payments. Once these are set, all payments are totaled and this amount is withdrawn from a client’s personal bank account as one single monthly payment. The debt management company will then pay all creditors listed on the account. In simple terms, a client will be consolidating multiple payments to creditors into one low monthly payment to be disbursed to creditors through this service.
What are the differences? Debt Consolidation Loan vs. Debt Management
Consolidation loans offer a quick fix solution and temporary relief by replacing multiple debts with one new loan. While they can feel as though they reset your finances and give you a fresh start, loans have some disadvantages that are difficult to overlook.
Because this type of debt consolidation requires a loan, it may only be an option for those that can qualify for borrowing. There’s no guarantee of approval or that if approved, the amount will be large enough to cover all outstanding balances the client possesses. If you can secure a loan, you may be looking at a high-interest rate and longer repayment term. This solution ends up taking longer than other options. Lastly, pursuing a loan may resolve your current financial problem, but does little to prevent the re-occurrence of debt.
In comparison, consolidating debt through a credit counseling agency’s debt management company comes with far less strict qualifications. Anyone whose situation does not qualify them for bankruptcy alone or who can realistically afford a monthly payment can take advantage of a debt management company. This repayment method will include lowered interest rates than those a client would have on their own and all debt would be paid within a five year period. One of the more underrated benefits of pursuing consolidation through a credit counseling agency is having access to financial education. Clients can gain insight into budgeting, saving, and improving their credit score and report.
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Know All of the Options
Debt Consolidation vs. Debt Settlement, Bankruptcy, Balance-transfer Cards
Because of a growing need for debt relief, many options are available on the market today. However, not all may be as beneficial or as reliable as debt consolidation. Alternative options include debt settlement, bankruptcy, balance transfer cards, and pursuing a personal or payday loan. Below are some brief pros and cons of each.
Debt Settlement: Debt settlement companies may be able to negotiate with creditors to reduce your total balance owed. You may feel relieved to pay back far less than you actually charged. Unfortunately, this savings is often equal to the fees debt settlement companies require for their services. What’s more, these companies have yet to show consistent success meaning you could pay thousands in fees and be left with just as much debt as you started with. Worse than this, strategies currently used by debt settlement companies have sometimes ended in costly lawsuits against those seeking debt relief.
What type of debt can you consolidate? Credit card debt is most commonly addressed through debt consolidation. However, all types of unsecured debt can be managed including past medical bills, debt in collections, personal or payday loans, and repossessions. Mortgages, car loans, or home equity lines of credit are all secured debts and cannot be enrolled in a debt management program.
Why Choose Debt Consolidation?
Working with a nonprofit credit counseling organization such as Debt Reduction Services can save you money over time, develop a long-term solution, and is effective because of adherence to governmental regulations.