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Understanding Debt Consolidation Options

By Ashley Russell on November 16, 2011

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For many Americans, debt is a very complex problem. Usually individuals are not severely behind on just one large payment but instead are having trouble with dozens of smaller payments. Paying back the little debts can be very confusing, overwhelming, and add up over time. For those looking to consolidate their debt, there are two main options they should examine.

Debt Consolidation Loan

The first option for individuals is to borrow for their debt consolidation. This is often called a debt consolidation loan. This can be beneficial in many ways. It quickly eliminates the complicated multiple debt payments that are due every month, since all of those are now paid off and the individual only has to pay one payment for the new loan now. Debt collection calls also cease because the many different debts are paid off and now as long as the single payment is paid the individual is not late on any payments.

Taking out a loan also does not negatively effect an individuals credit and may even help it because their debts get paid off and as long as they make the monthly payment they are staying on top of their debt which looks good to credit agencies. There are, however, some problems with borrowing to consolidate debt. First of all, since individuals looking at this option are usually very deep in debt and behind on their payments it is likely that they will have a very poor credit score, which will make getting a loan hard, let alone getting a loan with a lower interest rate. This process does no lower overall debts and can create a false sense of security. This is because an individual’s debt may seem to them to have magically disappeared, when in reality it has just been restructured and simplified. If that individual becomes behind on making their payments, depending on the type of loan they took out, they may be looking at losing their house or other collateral if they had to get a secured loan because of their poor credit score. Therefore, loans are only beneficial in lowering the amount of bills paid a month and possibly saving individuals credit, not eliminating any of the amount due.

Credit Counseling

Another option is to sign up for debt consolidation services and credit counseling. This is where an individual pays a fee to a company to enroll in their debt consolidation program. This may be helpful because it often decreases monthly payments and may help to eliminate some interest and fees from lenders. The best part of this option is that it also has an education portion of the program to help individuals to not make the same fiscal mistakes that got them into debt the first time. This option does have some problems, however, as it may be hard for some individual to enroll in programs because they must apply through private companies, who are in the business of making money. If the business does not think they can help the individual and make a profit doing so they will not accept them into their program. There are also sometimes significant fees to pay to the company for their services, which sometimes more than makes up for the amount saved by the company negotiating with lenders to lower fees and interest.

Debt Settlement Company

The major problem is the fact that while the company is negotiating with lenders on the individual behalf the individual must stop making any payments at all on their debt, as increased leverage against the lenders, which significantly damages their credit score. The effect from this depends on how long negotiating and program setup takes and how much debt the individual has accrued. Some individuals with secured debt will not qualify for these programs.

Overall the type of debt consolidation that is best for an individual depends on their situation. Individuals should check out several consolidation program options as well as the possibility of taking out a loan and compare the costs and benefits of each. Individuals should decide which option is the best for them and search out the company that has the best total price value as well as reviews from previous customers.

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