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Debt Consolidation Options

The idea of debt consolidation plans is to combine all of your outstanding financial obligations into a single monthly payment process.

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Debt Management Plans

There are several options to consider when it comes to managing your debt.

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Debt Settlement Programs

Debt settlement programs are where a single debt settlement company negotiates with your existing creditors to pay a lump sum that the original creditor receives at the end of your payment process to the settler.

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Consolidation FAQs

Find answers to common questions regarding debt consolidation, consolidated credit, and how it affects your credit score.

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Most Americans use credit cards to make most of their purchases. Be it a home mortgage, student loan, auto loan or just everyday expenses and bills, it is convenient to use credit to track and simplify purchases. The economic “recovery” has not necessarily reached individual households and many people used credit cards to try to solve their economic problems.

Although credit cards can streamline your spending process, any unexpected financial hit can put you in a situation where you get behind on your payments. The fees and penalties associated with such a failure to meet your financial obligations can create an untenable financial situation that seems endless. There are three major approaches to consolidated credit debt, each with different risks and benefits. They are Debt Management Plans, Debt Consolidation Loans and Debt Settlement.

Debt Consolidation Options

The idea of debt consolidation plans is to combine all of your outstanding financial obligations into a single monthly payment process. A lot of the cumulative financial burden of debt comes from late fees, penalties and rising interest rates which are much more likely to be incurred if you have to send out multiple payments each month. Just keeping track of when and how much to pay each creditor becomes complex and usually results in higher interest rates, penalties and fees. Consolidation plans combine all your monthly payments into a single monthly charge, increasing the value of your payments toward your eventual freedom from debt.

The Basics of Debt Consolidation Services >>

The goals of any debt consolidation strategy should be to 1) Make the debt manageable by lowering your monthly payments; 2) protect or even improve your credit score eventually 3) lower the cost of the debt by decreasing the amount of interest you are paying overall and 4) make you debt free sooner. There are three major approaches to debt consolidation: Debt Management Plans, Debt Consolidation Loans and Debt Settlement. Each approach represents a strategy to tackle your debt situation and create a path to a debt free future.

Comparing Types of Debt Consolidation Services >>

Pros and Cons of Debt Consolidation >>

Third Party Credit Consolidation Options

There are two broad approaches to involving a third party in the debt consolidation process: Debt Management Plans and Debt Settlement. Each has its advantages and drawbacks and it is necessary for you to assess your liabilities and assets on a monthly basis to determine which is right for you. This requires that you make a clear accounting of all your expenses and income on a yearly basis; taking all of the relevant factors into account so that you can formulate a plan to pay down the debt.

Debt Management Plans

Nonprofit Free Counseling Services

Often the cause of excessive debt is a lack of financial planning. A debt counseling service will help you organize your finances so that you account for all your monthly financial eventualities. The first step is to choose a nonprofit credit counseling service to help you assess your debts and assets and to provide a schedule and scheme for reducing your debt. Many nonprofit credit counseling services are available and are usually advisable for their lack of profit motive in securing your debt repayment process.

Credit Counseling and Debt Consolidation >>

Nonprofit Credit Counseling >>

Negotiating Services

Nonprofit agencies have contacts with the credit card companies that are useful in negotiating your final interest rates and payments. The agency will negotiate with your creditors to get them to accept a minimal monthly payment that will be affordable. With a steady payment that is paid in a disciplined fashion, the credit card companies are often willing to negotiate lower interest rates and forgive late fees. Essentially, you send a payment to the agency once a month and they divide your payment among your creditors. The soundness of the plan reassures the creditors that you will be able to pay them back over time. This form of debt consolidation does affect your credit score negatively but allows you to become debt free at the end of the process.

The Basics of Debt Management Plans >>

Acceptability to Creditors

This form of consolidation is the most recommended by financial experts, and with good reason. The most important reason is that to have ended up with debts you cannot pay strongly implies that you have mismanaged your finances out of ignorance. Although that may very well not be the case, it is reassuring to your creditors that you have engaged the services of a nonprofit credit counseling services. Often people get in over their heads financially through no fault of their own, but it is reassuring to creditors to feel you have received sound financial planning and guidance from a well-informed source.

For example, an unexpected illness, accident or injury can befall you or someone you care about and can be financially devastating. Regardless of the reason for your own debt, the creditors have little interest in your personal situation. When you are working with a nonprofit credit counseling service, they assume that professional financial advisors will take your finances in hand and educate you in the manner necessary for you to behave in a more financially responsible manner. This gives the creditor more confidence in your ability to pay the debt eventually.

Finally, the most compelling reason for you to use this method is that it does not result in borrowing yet more money. This process of debt management allows you to reduce your principle amount owed, pay down on your debt to your original creditors and repair your credit as you go through the process. Any other process of debt consolidation requires that you literally pay the agent that negotiates or pays off your debt for the service, incurring even more financial responsibility and usually a longer repayment period.  Also, other methods require that you pay for the service of debt consolidation so you are incurring yet more expense.

Choosing the Right Debt Consolidation Process for You

The Individual Approach

The individual approach means that you alone consolidate your debts without having to involve third party negotiators. The amount of debt you are in and the relative assets you have to devote to its payment will determine the appropriate debt reduction strategy. For example, it you have been using multiple credit cards and your payments have become excessive because of high interest rates and late fees, it might be wise to try a consolidated credit card payment. Some credit card companies offer interest free balance transfers with a short term “teaser” interest rate. This means that you move all of your individual credit cards debts onto a single new card, transferring the balances to a low or no interest card that you can start to pay down with one monthly payment. This strategy is appropriate if you have a good steady source of income and your debt is under $3,000.00. The new card becomes a way of lowering the interest rate on your debts and assumes you will be paying the debt off before the new card’s interest rate rises.

Preparing to Resolve Your Debts through Consolidation >>

Achieving Freedom from Credit Card Debt through Balance Transfers

There are several qualities to look for in a balance transfer agreement. Is the transfer free or does the new credit card company charge a service fee for the transfer? Some companies offer a free transfer; others charge a percentage of the debt transferred as a fee for the transfer process. Secondly, how long is the initial interest rate in place? The new card may offer a zero interest plan for 6 months, one year, two years, etc. You will need to calculate how long it will take you to pay off the balance to determine whether the new card will save you money on interest. Third, what is the interest rate after the initial no interest rate has expired? If it is higher than the one you are paying on your existing credit cards, the risk might be greater in switching cards. iI you have calculated that you will not be able to pay the debt off before the rate rises then this approach might not be advantageous. Finally, does the card require an annual fee? If so, it must be calculated in while considering the transfer of your balance to the new card.

Shifting Credit Balances: A Means of Debt Consolidation >>

Consolidated Credit Card Debt through Secured Loans

Another way to handle the consolidation process personally is to pay off the balance on your debts by creating a new single debt based on some collateral. For example, a home equity loan, a loan against your car or boat or life insurance policy is way of turning your assets into cash to pay off creditors. These loans tend to have lower interest rate than the credit card companies and usually offer better terms since they are secured by an asset. Refinancing your home or borrowing against your retirement account may seem very attractive in the moment where it is necessary to pay your monthly bills. However, you are risking your asset in the process. If you do not make your monthly payments in a timely manner on a secured loan you can lose that asset and be much worse off than when you started.

Using Secured Loans to Accomplish Debt Consolidation >>

Debt Settlement Programs

Often the cause of excessive debt is a lack of financial planning. A debt counseling service will help you organize your finances so that you account for all your monthly financial eventualities. The first step is to choose a nonprofit credit counseling service to help you assess your debts and assets and to provide a schedule and scheme for reducing your debt. Many nonprofit credit counseling services are available and are usually advisable for their lack of profit motive in securing your debt repayment process.

The Process of Debt Settlement

Debt settlement services exist for the purpose of negotiating the final lump sum to be paid to each creditor. The debtor will continue to make payments to the new creditor, the debt settler, who in turn places your payments into an escrow account. The debt goes unpaid to the creditor until an agreed upon amount exists in your account. At that point, the debt settlement agency will begin to negotiate with your creditors in the interest of getting them to forgive as large an amount of the debt as they can.

Drawbacks to Debt Settlement Services

There are several considerations to make before choosing this option. It is probably the least palatable of the options available to creditors. Often they will refuse to negotiate with debt settlement companies. There is no guarantee that the debt settlers will be able to reach a negotiated settlement, or that the final amount will be less than any other method of repayment. Secondly, you have to pay for their service, which is a fee. It is important to carefully read your contract with them to make sure that the company you choose is a solvent and solid company. Thirdly, it is important to make sure that you pay them NO fees until the negotiations and payoff is complete.

The length of time it will take to build your escrow account could be up to 36 months, and although you have lowered your payments on a monthly basis, any late fees and interest you owe on your debts will continue to compile during the 36 month period. Initially, the debt settler sets up an escrow account in your name. They collect payments from you until the amount in the escrow account meets the level of repayment that predetermined, for example, 50% of the amount owed. The monthly payment amount is up to you, but it is very important for you to carefully calculate how much you can afford to pay after your monthly and annual expenses that are essential.

This can be an attractive option on face, because usually the settlement company can get your debt down to a percentage of what you owe and often seek relief from at least the late fees and penalties. However, there are some severe drawbacks. Your credit score will take a huge hit from the process, and will retain that hit for seven years. The seven year credit rating loss is because of the service you have employed and the fact that you did not pay your creditors back in a timely or complete fashion. That means that any other credit card or loan you take out in that period will generate very high interest rates. It may very well keep you from buying a home or an automobile on credit until the seven years have passed and you receive a “clean slate” of credit. You will then be eligible for normal credit card interest rates and loans, but you will need to start all over with building your credit score back up to a reasonable level.

Where to Acquire Debt Consolidation Loans

Debt consolidation loans come from many sources. They can be secured by an asset or unsecured based on your existing credit score. Initially, looking at banks and credit unions as a source of personal loans is one option. Those are secured loans with a house, car, land or other type of personal asset backing up your claim that you will make payments on the loan. However, if you are not in a position to offer an asset as security, you will want to seek a loan from an online credit agency or debt consolidation company who have less stringent legal requirements. There are many to choose from. When comparing lenders, it is best to create a checklist of questions so you can categorically compare the interest rates and payment plans and chose the most beneficial one for you. This requires budgetary planning that creates a uniform set of financial practices that you are willing to stick to over a period of time.

Debt Consolidation FAQs and Answers

What types of loans can be consolidated?
Any unsecured debt accrued, including but not limited to credit cards, medical bills, student loans, rent-to-own contracts to name a few. It is true that some federally guaranteed student loans cannot be consolidated, but personal student loans are similar to any other form of unsecured debt.
How can I tell if the debt consolidation plan is better than my current bill paying process?
A simple comparison of the interest rates and time required to satisfy the debt will answer that question. If the payments of your current unsecured debt exceeds your ability to pay in a timely fashion, then consolidation is a wise choice. You must assess the current interest rates on your unsecured debt and calculate the length of time and amount of money it will cost to be free of the debt under the terms offered by that creditor. You then compare that number to the interest rate and time period associated with the consolidated loan solution. It may be that a lower monthly payment is worth a higher cost in the end, depending on your situation.
How can I prepare to apply for a debt consolidation solution?
The best way to prepare to choose a debt consolidation solution to make a very thorough list of your monthly expenses, categorically organized. First on the list is your existing credit card payments and their interest rates. Secondly is your monthly expenses like rent or house payments, food, transportation and health insurance. Some payments that occur annually like car insurance, medical expenses, tuition and taxes should be figured in so that all of your actual expenses are accounted for in your plan. Thirdly, find out what your existing credit score is and make sure that you take all of that information with you to any meetings you have with credit counselors. Having a good credit rating is very helpful when securing a consolidation loan, since the score will often determine the rate of interest you will be charged for the consolidated loan. The next step is to assess your income and potential sources of income. This is all you will need to evaluate which consolidation plan is best for you.
How do I choose between debt consolidation solutions?
The first consideration is the total amount of debt you owe. There are variable options, as explained above, based on the size of the debt and the amount of interest being accrued under your current payment system. Once the calculation is made, the second consideration is the stability of your income. If you are a tenured college professor, for example, you are fairly secure in your position. Your salary will be very predictable and the chance of retaining your position very high. Under those circumstances, a secured loan using collateral is probably your best bet. If the loan comes in the form of a mortgage refinancing, the rates of interest and time to pay are probably much lower and less onerous than an unsecured loan from an online credit company. Your personal bank or credit union is no doubt going to provide you with a much better solution than an independent company, especially if you provide collateral. If, on the other hand, your employment is less predictable and your income less secure, it might be wise to seek an unsecured loan in the interest of protecting your assets. The interest rate will always be higher, costing you more to settle the debt, but provides you with more protection for the assets that you possess.
Are Debt Consolidation Loans bad for my credit score?

One of the main reasons to consolidate your debt is because your credit score is taking hits from your late or missed payments. So the first thing a credit consolidation loan can stop the damage you are doing by paying late or missing payments. However, the fact that you take out a credit consolidation loan will affect your credit score negatively if you do not make your payments to the consolidation loan. That is why it is important to ask the consolidator to mark your former debts as paid in full to prevent further damage to your score. There will be some loss of credit rating from taking on the consolidation loan, but your timely and accurate payment of the single loan will also help repair the damage.

Debt Consolidation and Preserving Your Credit Rating >>

Final Thoughts and Considerations

No matter which of the three main strategies you end up choosing, it is important to note that none of these solutions offer anything like a quick fix. Debt consolidation, debt management plans and debt settlement services all take time. It is reasonable to expect that you will spend anywhere from three to five years paying off your accumulated debt, no matter which path you chose. No matter which approach you take, the first step is deciding to act. Once you have decided that you want to compare your options for action, it is very important to do a thorough assessment of your assets, your income, your expenses and your financial liabilities. Making a thorough list of your annual and monthly expenses is the first step toward determining how much you can afford to pay monthly. A list of the unsecured debts monthly payments and the specific level of interest you are paying on each debt is also necessary to decide which strategy would be appropriate.

The hardest part of dealing with unsecured debt may very well be just accepting that you cannot handle it without outside help. Denial is a totally understandable reaction to mounting debt, but it is devastating to your financial future. Sometimes it is necessary to recognize that the amount you owe is so great and your income so insecure that the only answer is a legally structured settlement like bankruptcy. Very often bankruptcy lawyers are willing to provide at least one free consultation to discuss your financial situation and will present you with the positive and negative consequences of a bankruptcy. Although not the panacea for debt relief that it once was; sometimes bankruptcy is your best option.