If you have several loans or credit card accounts that you are unable to pay that are piling up, you may want to consider applying for debt consolidation. Consolidation loans have helped many people to limit their debts down to a single monthly payment that they are able to afford. Through a debt consolidation program, you are granted a large loan that is used to pay off your smaller outstanding loans and debts, leaving you to pay off a single loan over a fixed period. Consolidation loan payments are generally a bit easier to budget with, as the loan is drawn out over a longer period, making the monthly payments smaller.
There are many debt relief options available today and you should compare each to find the best one for your financial situation that is going to end up saving you the most money. A debt consolidation loan should put you in a better position, with at least one aspect of the loan being an improvement from your current loan repayment situation. For instance, you might be able to get a lower interest rate, a simple repayment term, or just more savings overall. Always be sure that whichever debt management plan you choose to work with, it has positive benefits over your current payment plan and is affordable to your budget. Additionally, you need to understand the things that a debt consolidation loan cannot do for you.
Consolidation loans will not decrease the amount of your overall debt, nor will they address the factors that put you in debt in the first place. Your debt problems do not end when you consolidate your loans; you will still have a long road to travel to get out of debt and you will need to work hard to get there. Don’t treat a debt consolidation as an easy fix.
What Types of Debt Consolidation Services are Available?
If you decide that debt consolidation is the best option for your financial situation, you’ll next need to choose the type of debt consolidation that best meets your needs. There are several options for debt consolidation, which include:
Credit Consolidation Loans
Debt Management Plans
Credit or Debt Consolidation Loans
Credit cards have some of the highest interest rates as far as borrowed money. If you have multiple credit cards with maxed out balances, that money is only costing you more the longer you are unable to pay it off. Wouldn’t it be nice if you could just freeze the interest on those credit cards to finally start paying off the balance? With a credit consolidation loan, you can combine all your outstanding credit card debts under a single fixed rate loan. Consolidation loans can often have lower interest rates than forms of revolving debt such as credit cards, which can help you to save money each month when it comes time to paying back those loans. Use these loans to take a breather from your debt, gather your finances, and get back into good financial standing. Be aware that combining all your credit card debt into a single consolidated loan can sometimes hurt your credit score since the utilization rates on those credit cards will drop.
Debt settlement is a negotiation between you and your creditors to determine an amount of debt to be paid that is less than the total amount owed. While some debt consolidation companies say they can get 50% of your debt dropped, the result is often far less appealing. You will still accrue interest on your debt during the settlement process, which can take an average of 3 years. No matter how much of your debt is negotiated off the table, you will need to pay a fee of 25% on the portion forgiven, not to mention taxes on the total amount of debt forgiven. Your creditors will report debt settlement to the credit bureaus as well, which will damage your credit score exponentially for seven years. Creditor and lenders do not like having to enter into settlements where they are only going to receive a portion of the total debt owed, and it is important to remember how difficult debt settlement cases can be. While this is still the best form of debt relief for some individuals, it must be carefully thought out and all other forms of debt consolidation should be explored beforehand. If you are considering debt settlement, you’ll need to work with a debt settlement company to make sure that you are properly represented in court.
There are other ways to have portions of your debt discharged. Any service that helps consumers to limit or get rid of their accrued debt is considered a debt relief service. Debt relief services include debt consolidation, debt settlement, debt management plans, balance transfers, and bankruptcy. The best debt consolidation companies will offer these services, and will be able to guide you in choosing the one that best meets your financial needs. A lesser known debt relief service, the balance transfer, may be the first thing to consider. Through this debt service, you can apply to transfer your existing credit card debt from high interest cards to ones with lower interest, or even a 0% interest balance card. Like any debt relief program, it can be tricky to apply for a 0% balance card, as you’ll need to pay down your debts and maintain a pretty decent credit score to get one. And you’ll need to then be able to pay off that balance in about 18 months before your card transfers over to a higher interest rate. Not every debt relief service is compatible with every consumer debt case. Speaking with debt relief companies can help you to get a better understanding of your debts and what benefits you can expect from various debt relief programs.
Debt management plans are designed to do just that: help you to manage your existing debts. While you could try to create a budgeting and debt management plan on your own, it’s just not possible for most consumers who are deeply in debt. In this case, you can seek the aid of a consumer credit counselor or debt management company who offers several valuable debt solutions. One of those solutions is a debt management plan personalized for you. A consumer credit counselor will be able to present your debt management plan to your creditors to waive certain fees and negotiate your interest rates. If your creditors accept this plan, you won’t need to keep paying them. Instead, you will need to make a fixed rate payment to the credit counseling company each month, which will go towards your overall credit debt. The payment that you make each month with be a lot lower than the sum of the payments you were previously making, but you will need to forfeit your credit cards to take this route. This isn’t the worst thing, since not having credit cards will prevent you from incurring additional credit card debt. In some cases, your creditors may allow you to keep one active card for emergencies. Be prepared to stick with your debt management plan, as it can take four to five years to get to a point of complete debt relief.
Frequently Asked Questions
What is a debt management plan?
By participating in a debt management plan, you are no longer under obligation to pay your creditors. Instead you agree to pay the credit counseling agency who has set up your debt management plan with your creditors. You can say goodbye to the high interest rates of your credit cards and hello to a smaller monthly payment than the sums of your previous credit card payments. However, your credit card accounts will be closed, and it can take about five years to have your debt management plan completed.
What is debt consolidation?
Like a debt management plan, a debt consolidation program will allow you to combine all your existing debts into a single loan that you make one monthly payment on. By working with a debt consolidation company instead of a credit counselor, you may need to turn your unsecured debt into secured debt.
What is unsecured debt? What is secured debt?
Unsecured debt is debt that you are expected to pay, but that is backed by no real assets. In comparison, secured debt is debt that is backed by collateral, such as a vehicle or a home. If you are unable to pay a secured debt, you will be expected to forfeit any collateral that you have put up.
What is debt settlement?
By working with a debt settlement company, you can attempt to clear a portion of your debt, in some cases significantly lowering the total amount you are expected to pay. However, be aware that there are still fees that will need to be paid on the portion of your debt that you are no longer expected to pay, including a 25% removal charge on that portion of your debt. Creditors are not legally obligated to accept debt settlements, so there is no guarantee that a settlement firm will be able to process your request, let alone get a significant portion of your debt removed.
What is bankruptcy?
Bankruptcy is the last possible form of debt relief that a person can take. There are multiple steps that you are legally required to take both before and during a bankruptcy filing, including participating in credit counseling. If you are approved for bankruptcy, you can have most or all your debts removed, giving you a fresh start. Bankruptcy can damage your credit score significantly, although in most cases the credit score is already significantly bad. Additionally, bankruptcy stays on your credit report for 10 years.
Is there a debt service that will clear all my debts?
The simple answer is no. While debt relief services are designed to help you manage and even eliminate your debt over time, there is no easy fix or even a service that will eliminate your debts. You’ll need to work with your creditors and credit counselors to make actionable plans, lower your fees and interest rates, and begin working towards freedom from debt.
Debt Consolidation and Debt Relief-Common Terms and Definitions
The process of applying for a single loan to pay off all your existing debts. By combining all your debts under one loan, you can pay a single fixed rate each month.
Debt Consolidation Loan
A loan used to pay off all your existing debts, giving you one fixed monthly payment.
Services that are designed to help consumers remove portions of their debt, create debt management and repayment plans, and work towards paying off their existing debts in a manner that best fits their finances.
Combining all your credit card debts under a single loan, usually with a lower interest rate.
The legal process of working with creditors to have a significant portion of your debt absolved.
Debt Management Plan
A financial plan created in conjunction with a credit counseling service which allows the consumer to pay a fixed rate to the credit counseling agency, who uses that money to pay off existing credit card debts.
The amount of cash required to pay off the interest and principal of a debt over a specified period.
Services and methods that help you to pay back your creditors.
Debt Relief Companies
Companies that provide services that help consumers to get out of debt.
Loan Consolidation Companies
Companies that provide consolidation loans that can be used to pay off existing debts in exchange for one monthly loan payment.
Debt Relief Services
Any services, such as debt settlements and debt management plans, that aim to help consumers get out of debt.
A financial and legal process through which consumers can significantly reduce their existing debts through a variety of services.
The process of combining several unsecured debts into a single bill. Unsecured debts can include credit card debt, medical bills, personal loans, etc.
Relevant National Debt Consolidation Laws, Rules or Regulations
The Federal Trade Commission is the nation’s consumer protection agency. As such, they regulate consumer debt practices, including regulating how debt collection agencies can petition consumers. Under the Fair Debt Collection Practices Act, debt collectors are not allowed to harass consumers when attempting to collect their debts. Collectors are not allowed to threaten or use profane language, must always identify themselves to consumers, and are not allowed to publicly identify consumers who owe debts in any form. Debt collectors are also not allowed to repeatedly telephone consumers to collect debts in a manner that can be construed as annoyance or harassment. Another key point of the Fair Debt Collection Practices Act states that collectors are not allowed to use false statements, such as who they represent, or use false implications about the consumer.
The Telemarketing Sales Rule also applies to consumer debts, but to protect them from debt management companies who are not operating according to legal standards. For instance, such companies are unable to collect fees from a customer before settling their debts. A fee can be collected for each debt settled, but fees may not be collected up front. Debt relief companies must also disclose certain information before allowing a consumer to sign up for their services. This information includes the cost and length of time it will take services to be completed and any negative consequences that may happen because of their services. Like debt collectors, debt relief companies are not allowed to misrepresent themselves and their services.