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Debt Consolidation vs Debt Negotiation vs Credit Counseling

Falling into debt almost seems to be an American pastime these days. Getting out of debt is a bit trickier. Fortunately, consumers have several options to choose from, including debt consolidation loans, debt negotiation, and credit counseling.

Debt consolidation loans are available in two categories: secured and unsecured. If a consumer has property that can be used as collateral, such as a home, real estate, or a vacation property, he or she might qualify for a mortgage, home equity loan, or a refinanced loan. However, if the consumer does not have anything to be used as collateral, then he or she will need to acquire a personal or unsecured loan.

Debt Consolidation Loan Basics

To consolidate debt, consumers can acquire a loan that is large enough to pay off their debt. The amount of this single payment is typically lower than the total of the individual debts. Additionally, the interest on the debt consolidation loan will probably be lower. Once a consumer decides to consolidate his or her debt with a loan, he or she applies, receives approval, pays off all old debts, and begins to make payments on the new loan.

Debt Consolidation vs Debt Negotiation vs Credit Counseling

Consumers have the option of refinancing their current mortgage, borrowing enough to pay off their current debts outside of the mortgage, and consolidating their debts into one monthly payment. Additionally, a home equity loan, secured by the consumer’s tangible property, can be acquired to pay off the consumer’s debts, restructuring the amount owed into a single payment.

Secured loans have several beneficial aspects including lower interest rates, longer terms, smaller payments, and the ability to borrow a larger sum of money. However, if the consumer is unable to continue making the payments and defaults, the property used as collateral is at risk.

A personal loan is another option, especially for consumers whose credit is still on the positive side of things. Personal loans typically have higher interest rates, shorter terms, and higher monthly payments. On the upside, the consumer’s assets are not at risk with this type of unsecured loan.

Debt Negotiation

Technically, this is not consolidation of debt, but elimination of debt. This is often the best plan of attack for consumers with extremely bad credit who cannot afford to make regular payments.

With debt negotiation, the consumer generally contacts a credit counseling agency to negotiate for him or her. Typically, the agency contacts all creditors and renegotiates the debt to a smaller amount to settle the account. The credit counseling agency handles the payments for the consumer. Once the creditor accepts payment, the debt is cancelled.

Credit Counseling

Credit counseling usually involves a debt management plan introduced and formulated by the credit counseling agency. In this type of plan, the credit counselors look at every piece of the consumer’s credit and financial information, including income, debt, and disposable income. From this information, the counselor calculates a monthly payment for each creditor, excluding secured loans.

The counseling agency contacts creditors, requests waived fees and a reduction in payments. Typically, creditors will oblige once they know that a debt management plan is in place. The consumer will be required to make a single monthly payment to the credit counseling agency, which will make the payments for the consumer.

Since the consumer is not making the payments, it is important for him or her to use a reputable agency and to request verification that the payments are made. Generally, this plan continues until all debts are paid or the consumer experiences a significant positive change in his or her financial situation.

Debt consolidation is not an easy process, but with perseverance and discipline, consumers can reclaim their financial freedom and climb out of debt.

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