What is Debt Consolidation?
When you’re having financial trouble because you have too much unsecured debt for your finances to handle, debt consolidation may be able to provide the relief you need. It doesn’t work for every situation, but consolidation often helps people pay their debts back in-full in a way that’s more manageable within their monthly finances. Still, with so many options for debt relief available, what is debt consolidation and how is it different?
If you’re confused by all the options you have to find debt relief, a certified credit counselor can help provide the information and financial understanding you need. Give us a call at 1-800-320-9929 to speak with a counselor to get professional advice on which debt relief solution is right for your unique financial situation. You can also get started online with a Free Debt Analysis.
What Does It Mean to Consolidate My Debts?
Debt consolidation may sound complicated, but the idea is more simple than you might think. You take multiple unsecured debts and combine them into one monthly payment. This reduces the number of bills you have to pay, but the real goal is to reduce the total amount you pay on your debts each month. Debt consolidation does this by reducing the interest rates on your debts, which slows down how fast your debt builds and how fast you have to pay it back.
This doesn’t work for every type of debt; only unsecured debts can be consolidated. Debt consolidation is mostly used to consolidate high-interest credit card debts. You may also be able to consolidate unpaid medical bills and, in some cases, payday loans and cash advances. These kinds of debts are often the biggest offenders in causing problems for your finances, which is why debt consolidation can be such a benefit to your finances.
Do I Have Options in How I Consolidate?
There actually several different types of debt consolidation, including personal unsecured debt consolidation loans, home equity loans (a secured consolidation loan), and a debt management program. All of these options do the same thing in combining your multiple debts into one, lower monthly payment. The difference comes in how they allow you to do this.
- Unsecured debt consolidation loan. With an unsecured consolidation loan, you take out a personal loan to consolidate your debts. This do-it-yourself debt consolidation option requires you to have a strong enough credit rating to qualify for a good interest rate without any collateral. Usually, unless you have really excellent credit scores, you can’t get a good enough interest rate to reduce your monthly payments enough to make this a viable option. However, if you’ve managed to maintain a perfect credit score even through your problems with debt, you may want to research banks and lenders to see about unsecured consolidation loans.
- Home equity loans. This is exactly like the unsecured loan described above, but you put your home up as collateral in case you don’t pay back the debt. While it’s typically easier to get lower interest rate on a secured loan, this is also an extremely risky way to pay back your unsecured debts. If you fail to make your payments, you could potentially lose your home trying to pay off your credit cards. This is why many experts warn consumers to avoid home equity loans if possible.
- Debt management program. A debt management program offers a way to consolidate your debts when you have less than perfect credit and don’t want to risk your home. You enroll in a debt management program through a credit counseling agency. You pay your one payment to the agency and they negotiate and pay your creditors on your behalf. Since the interest rates are negotiated by your counselor, you can enroll in debt management even if you have bad credit.
Is Debt Consolidation My Only Option?
People often get confused by all the terminology and the wide-range of options you have available when you’re struggling with a debt burden. In addition to the options you have under debt consolidation, there are some other options for debt relief that apply to people in different situations.
- Balance transfer. A balance transfer simply takes the balance from one of your high interest credit cards and transferring it to a credit card with a lower interest rate. Like debt consolidation, you can move multiple debts to the card with the lower interest rate, which reduces how fast your debt builds interest. However, since it’s a credit card and not a loan, you have to be careful that reducing the interest rate will actually change your monthly payment schedule. Credit card payments are calculated differently, so in some cases, this may not help your immediate situation. In addition, be aware a special “balance transfer APR” may be applied to these transactions.
- Debt settlement. This debt relief option is for people in a situation where they can’t pay their debts back in-full. Debt settlement allows you to settle debts for less than you owe, but the credit penalties are harsh and stay on your credit report for 7 years. This means you typically should explore all your debt consolidation options before you look into debt settlement.
Of course, if there’s no way to consolidate your debts so you can pay them back in-full and you can’t reach an agreement with your creditors to settle your debts, bankruptcy may be the only option you have left. This is why it’s important to talk to a financial expert when you’re facing problems with debt, so you can make sure you explore all your options to get out of debt and avoid ending up in bankruptcy court.
If you need help weighing your options or you’re still confused by all the different debt relief choices you have available, give us at call at 1-800-320-9929 to speak with a certified credit counselor. They can assess your debts and evaluate your budget for free, plus provide information on which debt relief option is right for your situation. If you prefer, you can get started online with a Free Debt Analysis.
Contact Consolidated Credit Counseling Services at 1-800-320-9929 to find out if a debt consolidation program would work for you. A certified credit counselor will ask you questions about your unsecured debt and personal finances and advise you what the next step is. You don’t have to do debt consolidation on your own. Consolidated Credit Counseling Services is here to help.