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 Once these are set, all payments are totaled, and this amount is withdrawn from a client’s personal bank account as one single monthly payment.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.
- Bankruptcy: Bankruptcy can clear individuals of oppressive debt and provide somewhat of a fresh start. This method of debt relief, however, is a major mark on your credit history and is the most damaging option to your credit score. Additionally, a noteworthy amount of bankruptcy filers finds themselves filing a second bankruptcy later because of unchanged behaviors and spending. Bankruptcy also does resolve student loan debt. For these reasons, bankruptcy should be a last resort.
- Balance Transfer Cards: Balance transfer cards can offer short-term relief for lesser amounts of debt. By transferring debt (sometimes for a fee) to these credit cards, you can ditch your current high-interest rates for 0% APR for a limited set amount of time. This may provide the time necessary to pay off your debt before you are subject to an interest rate equal to or greater than the one you had hoped to escape. Balance transfer cards can help to reduce the amount you would have paid in interest; however, they do not in any way reduce your current balance. They are considered risky since they do not address the cause of your debt accumulation, leave you with an opportunity to charge more debt, and can sometimes require the balance to be paid in full once their initial promotion ends.
- Refinancing: When refinancing their home, some individuals choose to increase their mortgage loan to cover and pay their credit card debt It is a high risk since secured debt is being acquired in place of unsecured debt. It can or should only be considered an option if the homeowners have more equity in the home than what is owed and if the home still has a positive market value.
What is the best way to consolidate debt? Utilizing a debt management plan is typically the best method of repaying debt for the majority of individuals. It is universally accessible and can be accomplished with the least amount of money in the least amount of time. It is a comfortable process as terms of the program will be discussed and settled upon with interested candidates. You will also benefit from having credit counselors and service representatives to answer questions and guide you through the process all along the way. You will not only be informed of the progress toward becoming debt free, but you can also receive beneficial information regarding other areas of your financial health. Credit Counseling Agencies may provide the best route because they offer the most comprehensive approach.
What type of debt can you consolidate? Credit card debt is most 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.
- Is it right for you?
Some indicators that you should consider debt consolidation include your expenses often exceeding your income, feeling reliant on credit cards or payday loans or your payments toward debt are taking more and more of your monthly budget. If you are worried your debt is getting out of control and are committed to paying it in full, then taking action sooner rather than later can save you money, time, and hassle. Consolidating your debt may be the best way to do so if you are battling growing balances, have high-interest rates or unmanageable monthly payments, or are frequently contacted by creditors attempting to collect on your debt. To successfully achieve debt relief through debt consolidation, you must be willing to provide necessary documents relating to your debt, revise current spending habits to create room in your budget for one monthly payment, and cease most credit usage for the length of your repayment plan.
- Do you qualify?
Unlike a debt consolidation loan, a debt management program does not have any financial qualifiers. Anyone can take advantage of this type of program. However, if your combined debt falls under $1,000, your best option is to repay the debt on your own. A consultation, during which a nonprofit credit counseling agency reviews your finances, can help you create a debt repayment strategy. Debts amounting to more than $1,000 can be more difficult to overcome and are an enjoyable time to seek additional help. This can be a real solution for relief for anyone carrying debt as small as $1,000 even up to hundreds of thousands of dollars. The best way to determine your eligibility and best debt repayment option is to arrange an appointment with a certified credit counselor who can thoroughly assess your individual financial circumstance.
- When is it not the best option?
No matter the option you choose, it is important to weigh your investment of money and time with the results you are being guaranteed. Make sure these costs will be worth the outcome. For example, if you can repay your debt on your own, seeking a service to do so for you is not a good financial investment. Generally, other options such as bankruptcy may be better for individuals who do not have the ability to meet the financial obligations of a debt management plan because of a lack of steady employment, an insurmountable sum of debt, or because creditors have moved beyond negotiation. While debt consolidation may not always be the best match for you, debt settlement, balance transfers, car title loans, and home equity lines of credit can come with a high cost and be ineffective or create even more debt. Therefore, we do not recommend them as helpful alternatives. We would advise, again, that individuals researching their options attend a free consultation through a credit counseling agency to accurately understand how they can take advantage of the many resources offered.
How do you consolidate credit card debt on your own? If your financial debts are fairly insignificant, you feel confident you can develop a repayment strategy, and you are ready to maintain the discipline necessary to pay your debts off on your own, your first step would be to gather creditor information and current balances for each account owed. It is wisest to choose one place to compile all your data such as a spreadsheet, whiteboard, or journal. You’ll want to list out your debts including the account name, the interest rate, the current balance, the minimum payment required, and the payment amount you’ve determined to pay. The order of this list will be based on which repayment strategy you feel will benefit you the most. Begin making monthly payments to each including one larger payment to the highest priority account. Be sure and verify monthly remaining balances with your creditors and write in these new balances wherever you are tracking progress. Once an account has been paid in full, it is important to reassign its payment to the next account with high priority. This aggressive approach is proven to be successful.
- What should you do to stay out of debt?
The surest way to eliminate debt on your own is to combine an aggressive repayment strategy with a simplified budget. During your repayment process, it would be best to freeze all credit card usage or borrowing. You’ll find it nearly impossible to conquer a balance if you continue to add to it. Next, track your expenses every month. Do this to understand how much money is coming in and where every dollar goes when it leaves your bank account. Consider your purchases and weed out any unnecessary spending. Usually, you can modify spending on utilities, TV subscriptions, gas or transportation, clothing, groceries, dining out, and entertainment. Freeing up this money will create room for the necessary payments needed to get out of debt. This revised way of living will also ensure you will be able to save for medical and other financial emergencies and be less reliant on credit usage and borrowing on a daily basis.
Debt consolidation benefits
- How it works
Debt consolidation allows a client to pay down multiple accounts owed with one monthly payment. At Debt Reduction Services, clients first meet with a certified credit counselor to better understand their finances and assess their eligibility for a debt repayment program. Once repayment is determined to be feasible, negotiations with creditors are pursued by either the client or the credit counseling agency. Counselors and clients will discuss a repayment plan. Should the client agree to the terms, they will be enrolled in a DMP through which they will make one low monthly payment to be disbursed to their creditors. A client’s repayment process will last 5 years or less. During repayment, clients will be encouraged to review financial education webinars and articles provided.
- How it can help
This easy approach provides clients with honest counsel, organization, and accountability, three keys to success. Debt Reduction Services is also able to offer help in reducing fees and interest rates, as well as supply financial education and informative support, to guide clients along the way. Utilizing a debt management plan is unequivocally useful because it simplifies the process of repayment, supplies a proven method for success, and saves clients up to thousands of dollars in reduced fees, charges, rates, and because it often shortens repayment terms.
It’s easiest to visualize the impact if we use an example. If for instance, you attempted to repay $20,000 worth of debt on your own, after fees, interest, and a drawn-out repayment period as long as 20 years, it is likely you would have paid $60,000 in total. If, however, you apply consolidation along with lowered interest rates, even with program fees included, after five years your debt would be paid in full totaling only $23,000.
- What Debt Repayment Can Help You Do? Aside from finding relief from paying off oppressive debt, consolidating your bills and completing a debt management program comes with several other benefits. As you pay off your creditors on time and according to terms, these acts will be reported to the credit bureaus. This, in turn, will improve your credit score. Additionally, even in the process of whittling down your outstanding balances, you will be working towards a healthier debt-to-income ratio. Individually or combined, these benefits can improve your chances of being approved for a car or home loan should that be a goal for your future.