Debt Consolidation

Debt consolidaton is a rather vague term, and the possible definitions for "debt consolidation" have grown tremendously in only the last few years. In the most traditional sense, it means getting one loan to pay back many loans. The goal is to simplify or lower interest rates. Unfortunately, getting a loan with bad credit or high debt to income ratio is very difficult these days. So the forms of debt consolidation have grown. This page is to designed to go over the main forms of debt consolidation in order to help you decide which is best suited for you.

Debt Settlement

This is one of the most practical methods available to a debtor. Instead of paying the balances in full, you hire a company to negotiate settlements on your behalf. You will be required to show a financial hardship of some sort (laid off, medical, major emergency expentiture, etc). The advantages are that you will be making only one payment into an escrow account for the purpose of negotiating the debts. You will pay off the balances for about half of what you owe and be rid of debt much faster than any of the other methods mentioned below. The primary disadvantage is that your credit will take a hit while accounts are being negotiated but will not show as any form of third party assistance on your credit report, as does bankruptcy or credit counseling. Also, debt settlement will not work for secured debt, e.g., mortgage, student loans, pay day loans, or any secured loan. Only unsecured debt can be negotiated. This is a very aggressive form of debt consolidation, so be prepared for a fight. However, if you stick to the plan, this is a very effective way to get rid of credit card debt.

Debt Consolidation Loan

This is purest form of debt consolidation. It involves getting a loan from your bank and using this loan to pay off many other debts. Ideally, you will want to get a loan with a lower interest rate than what you are currently paying. The advantages are that you now only make one payment at a lower interest rate. The disadvantage is getting the loan can be very difficult for reasons stated above. Most lenders do not want to lend more unsecured money to somebody in a bad financial situation. However, this should probably be the first place you look to see if you can qualify. It will have the least detrimental effect on your credit.

Refinancing your Home

This is the most traditional form of debt consolidation. The primary reason to refinance is because you are getting into some trouble with debt. It is, therefore, a form of debt consolidation. Advantages are you are simplifying at a lower interest rate on your home (hopefully). Disadvantages are that you have increased your debt to income ratio and this will hurt your credit score and have now increased the amount of time it will take to pay off your home. Now you have turned an unsecured debt into one that is secured, contrary to the advice of most financial planners. Many people get into trouble refinancing second and even third mortgages. The problem is the debt keeps piling on because you have not fundamentally changed your spending habits. Of course, there are emergencies that require such action, but if you are doing this just to keep afloat, then sooner or later, you will sink.

Credit/Debt Counseling

This approach involves working with a company that will contact all of your creditors to try to set up payment plans that you can afford. You will pay them only once a month, so here again, it is a form of consolidation. Sometimes, you can get them to reduce interest rates to something more reasonable than the 29.75% you are paying now because they hiked up your rates and applied this retroactively to your balance. But you will still pay interest. You will pay the loans back in full. Your credit will be severely impacted. Advantages are that creditor calls will stop, you have piece of mind that your debt is being responsibly taken care of if you manage to complete the program, and eventually will be out of debt. The disadvantages are numerous: 1. Don't be fooled by the non-profit status of these companies. 2. They were set up by the credit card companies in order to colllect as much as possible on the debt owed. 3. As soon as you make a payment through a CCCS program, the debt will show as a TPA on your credit report. This is as bad as a bankruptcy in the eyes of most creditors! 4. Usually, these programs fail. The terms can be as long as 10-20 years, rather like having a second mortgage and nothing to show for it. Anyway, the success rate of a CCCS type program is quite low, less than 5% is an accepted figure.

Pay Day Loans

Whether you realize it or not, this is a form of debt consolidation. Why did you get the payday loan? To take a vacation? Very doubtful. Usually you are just trying to pay a debt (mortgage, rent, utilities). I would avoid this form of debt consolidation. Advantage: You paid your bills! Disadvantages are all spelled out in that contract you signed. First, they have now secured your paycheck. Ouch. And if you read further, the draconian methods they have at their disposal to collect on the debt are ridiculous. The interest rates are always sky high. This is the option used by those with no credit or bad credit. Unfortunately, it puts the individual on a treadmill that only gets faster and soon becomes impossible to get off of without major financial injury. Avoid this at all costs.