Deciding on Debt Consolidation vs. Debt Counseling

When it comes to getting out of debt, debt counseling and debt consolidation are two great options. However you need to understand how each option works because they both have different terms and conditions that apply. Carefully analyze your finances and your budget, and then review the information in this article to determine which debt relief choice is best for you.

Debt Consolidation

In the most basic of terms, debt consolidation works by taking all of your individual debts and combining them under one big loan. That way you only have one bill to worry about each month and only one rate of interest. This is a broad term that encompasses many different options, but the most popular is the debt consolidation loan. This works with all kinds of debt, including credit cards, individual loans, and student loans. Debt consolidation is great because it puts all of your debts into one easily-manageable place. Some other alternatives are debt settlement, debt negotiation, and – what we are discussing here – credit counseling.

Credit Counseling

Credit counseling can actually be seen as a type of debt consolidation because you are consolidating all your debts and payments. The difference is that you will work closely with a credit counselor, who will guide your decisions and provide assistance with your debts. You send the monthly payments to this third-party agency and they take care of distributing the money accordingly.

Similarities

As mentioned before, both choices are methods of debt relief that help you consolidate and manage your debt. But know also that both options will most likely require a steady and secure source of income. You may bypass this with secured debt consolidation by putting a valuable asset, such as your home, up as collateral. But this is a very dangerous idea and you could potentially lose your home if you default on the loan. In general you should try and pay for the consolidation with cash instead of putting up collateral. And the lender will want a guaranteed source of income to make sure they will be getting their money. In the same way a credit counselor isn’t going to want to help if you have a shaky or spotty employment.

Differences

One difference is that credit counseling and debt management is often linked to the creditors themselves. The creditors like to provide such non-profit agencies because it ensures that they will not lose any money as their borrowers are getting help with the payments. This might seem a bit biased on their end, but regardless it is benefiting both parties. You get the guidance and assistance you need to make payments and they get their money without cutting any losses. Debt consolidation, on the other hand, doesn’t necessarily involve a company connected with creditors. You are working directly with the creditors to manage your bills and you don’t have to pay a third part.

Another difference is that your credit score factors differently in both options. For debt consolidation it is imperative that you have an average-to-great score to maximize the benefits from the loan. The better your score is the better the terms of the loan, meaning lower rates of interest and longer repayment time frames. Bad credit means high interest rates or having to resort to putting up collateral with a secured loan. But your credit score doesn’t matter as much with credit counseling. Regardless of where your credit stands, if you can prove you have the means to make the monthly payments then you should be guaranteed a decent management plan. The downside is that you won’t have a chance at better rates from having good credit.

A final difference, and a pretty obvious one, is that credit counseling will offer outside assistance that you won’t get with debt consolidation. When you have a credit counselor you are getting advice on how to manage your debt plus you have someone who is constantly making sure you are managing it properly. However with debt consolidation you are on your own and solely responsible for making sure you keep up with payments. If you have trouble budgeting or disciplining your spending/payment, then credit counseling might be the better option for you.

In Conclusion

At the end of the day it is ultimately up to you to decide which debt-relief road you will take. Take what you’ve learned here into account, but do even more research if you feel the slightest bit unsure. It is important that you carefully consider your current financial circumstances and pick the option that best matches your budget, income, and situation.

Obtaining Bill Consolidation Loans for Those with Bad Credit

Let’s split the term “poor credit bill consolidation loans” into two components. The “bad credit” signifies a low credit history and the remaining portion, which is “bill consolidation loans,” indicates the loan is a type of debt consolidation loan which can be used to settle bills. It just so happens that frequently individuals have a tendency to have a poor credit rating and are also in want of money to settle bills. A bill consolidation loan for individuals with low credit is hence the very best option that an individual can get in that scenario. The main reason this loan is a great option in this situation is that it may be utilized to repay the charges and debts, and prevent the interest from piling up. The second advantage of the loan is that you may also stop the credit rating deterioration, which is a consequence of the overdue payments.

Qualifying for a Loan

The easiest method to obtain a poor credit consolidation loan is by filling out the application for the loan. After the application is submitted, it’s given to the lenders. The lending organization then begin the procedure for acceptance of the outstanding loan. The lenders first confirm the borrower’s identity with the local authorities or the banking institution where the borrower has a bank account. The lenders then ask for a credit report from a credit score company. The credit report includes your own credit history, which is really just a listing of credit facilities which you might have used previously. The credit report also includes your credit rating that refers to every one of your present debts and financial obligations. The final component in the credit report is your credit score. The credit score is a number which is calculated from both the credit rating and history.

Unsecured Vs. Secured Loans

Since the poor credit consolidation loans are supplied to individuals whom have a poor credit background and rating, the loan is the majority of the time a secured loan. This means the borrower must promise some valuable asset to the lender. where the applicant of the outstanding loan, has an excellent job with an excellent income projection, the debt consolidation loans can be considered unsecured loans. In rare instances, people with great credit also acquire the loans for bill consolidation. In such instances where the likelihood of default is very low, the lenders approve the loan minus the assurance of security. In instances where the secured loans are defaulted, the lenders recuperate the lost sum by selling off the promised asset. These consolidation loan types are long term loans, and their principal amounts are fairly substantial. Such loans are thereby refunded in a number of payments which are spread out over several years. Because the period of time of the loan can be quite long, the amount of interest that’s levied is fairly low, which makes the price of one single payment, minimal.

Improving Your Credit

As stated above, such consolidation loans also are shown to be quite useful in enhancing the “poor” credit ratings and score. The idea in this is straightforward. The credit rating and credit score of any individual comes falling down, due to 2 factors, specifically, overdue payments or overdue installments and the default of any credit fatality. The credit rating and score at the same time can be enhanced with the assistance of timely re-payments. The cost of payments of the consolidation loans is really low as a result of the low interest as well as a longer time frame. Therefore, it’s also really simple to pay off the payments of the loans. The best way to enhance the credit score would be to pay off the payments right on time. Every timely payment increases your credit rating and enhances your credit score.

Therefore, by the time you end paying back the debt consolidation loans, your credit rating and score return to normalcy and you will become debt free. You have to also remember that making on-time payments of the loan installments is tremendously crucial.

Different Options for Consolidating Your Credit Card Debt

Rising credit card debt is never desirable. A person ought to manage to cover no less than the minimal balance on the credit card. Missing even a few payments will lead to raising the rate of interest by as much as thirty percent. Furthermore, if someone defaults on one credit card, it would raise his/her interest rates on all credit cards. In the event an individual spends any more than 50% of the credit limit on a month-to-month basis, the credit reporting agencies interpret it as a significant cash-flow issue, which will lead to the individual being not able to pay his/her bills on a routine basis. This would, in turn, lessen the credit rating by as much as seventy points. Insurance firms – such as auto insurance, life insurance, and personal health insurance companies  – use the info in credit reviews while creating insurance scores. A tremendous credit card debt may lead to insurers refusing insurance policy renewal. Apartment complexes might not be inclined to lease an apartment to an individual who’s behind on his/her credit card payments. Consequently, individuals should attempt to pay off their debt as quickly as possible. Credit card debt consolidation is just one of the means of reimbursing credit card debt.

What Exactly is Debt Consolidation?

Debt consolidation is a method of replacing several loans with an individual loan that has a lower rate of interest. It is achieved via debt consolidation organizations which negotiate with the lenders, and help bring down the owed sum, in addition to offering financing at a lower rate of interest, to help settle a ton of loans. Most credit card issuers are ready to negotiate with a customer, and let him or her consolidate his or her debts, rather than turn over the debts to some debt collection company.

Transferring the Credit Card Balance to Another Credit Card

A credit card with a lowered rate of interest or a card with zero percent introductory annual percentage rate can help free up money, which may subsequently be utilized to cover the credit card debt. Transferring the old balance to a new credit card that has a reduced interest rate is achievable as long as an individual has a superb credit score. For those who don’t, 0% introductory annual percentage rate might help them conserve cash on the interest for a span of 3 – 6 months. Needless to say, following the initial 0% opening rate of interest, an individual will be expected to pay a higher level of interest. At this time, the individual could try and transfer the total amount to an additional credit card that offers 0% introductory annual percentage rate. This procedure can’t continue forever, but it’s possible to buy some time and conserve money on interest rates and attempt to settle your credit card debt.

Utilizing the Equity on the Home

A person could borrow against the built up equity on the home. Built up equity is the variation between the marketplace price of your home and the remaining current mortgage balance. This really is achievable only in the event the drop-off in the housing market hasn’t led to a damaging equity on the residence. A individual can take out either a home equity loan (HEL) or even a home equity credit line (HELOC) utilizing the built up equity. This results in changing the unsecured credit card debt to secured debt, the security being the home. A person should ensure that he/she pays the interest on home equity loan or home equity line of credit otherwise he or she is vulnerable to losing the dwelling.

Borrowing from your 401(k)

This may not be a terrible idea, since borrowing from your 401(k) does not result in fees. A person is anticipated to pay a reduced interest rate and the interest paid is credited to the 401(k) account. Still he should make sure that he or she pays the interest on time, since defaults are reported to the Internal Revenue Service and a person would need to pay a fee on any outstanding 401(k) loan.

Borrowing from Your Insurance

It is a possibility for individuals who want a loan that is significantly less than the cash value of the policy. In the event the sum of credit is more than the cash value of the coverage, the beneficiaries won’t be entitled to a death benefit. Consequently, you need to try and pay back the coverage as soon as possible.

Refinancing Your Home Mortgage

This is really a great choice for a person who is paying a fixed rate of interest on the mortgaged home. Such an individual will unquestionably gain from refinancing the home, because interest rates have fallen substantially. House refinancing is the process of utilizing the same home as security to be able to get a secured loan. This mortgage, that is supplied with a reduced rate of interest, can assist a person consolidate his or her credit card debt.

Debt Consolidation Loans for Bad Credit

More and more consumers are certainly having to exercise better financial management in light of the state of the present economy. However, there are many who have are forced to consider more innovative alternatives if their credit standing has declined to a less than average rating. Having a bad credit rating does not eliminate all the options. There are many ways to bridge the difficulty, and one viable method is through debt consolidation. Common sense dictates that a bad credit score will result in the consumer having to absorb higher interest rates and possibly longer payment terms, but the fact remains that there are lending institutions quite amenable to consider the risk as acceptable and offer suitable debt consolidation loans.

Secured or Unsecured Consolidation Loans – The Options

Most lending institutions have numerous options available for the consumer considering a debt consolidation loan, though these offers will vary in requirements depending upon the current credit standing. One type is the unsecured debt consolidation loan which is much like a standard unsecured loan for bad credit, where there is no collateral offered as a security to the lender to offset the risk of default should the borrower fail to repay the loan. Consequently, this type of loan is much harder to gain approval for, and will usually demand far higher interest rates as a result.

A secured debt consolidation loan is the type that requires or stipulates the use of collateral as security, such as the borrower’s home or other asset such as an automobile in which there is an adequate amount of ownership equity available. The equity is the most common of assets available to the borrower, and invariably decreases the interest rate considerably. Another variation on this particular method is an actual home equity loan, which is drawing on accumulated equity value in the home to gain the necessary funds to pay toward the smaller outstanding credit obligations, which are in most cases, like credit card accounts, having a higher interest rate than the home equity loan would carry. In this manner, the home equity loan acts as the debt consolidation loan for a borrower with bad credit.

Lower Interest and Easier Budgeting – The Benefits

One major benefit of the debt consolidation loan is when the interest rate the lender offers in the process winds up far lower than most, if not all, of the existing debt the borrower is attempting to combine. For instance, if the general interest rate amounts for the credit cards are set at ranges such as 13.9%, to 16.9%, or as high as 19.9% or beyond, and the debt consolidation loan rate is 12%, then the borrower sees a substantial savings, along with the lower monthly payment, as long as the repayment period is not overly long to offset the benefit.

All of the benefits of a debt consolidation loan for bad credit borrowers are definitely worth considering. These loans have far less interest rates than payday loans, short term loans, and credit card loans. In addition, managing a single lower payment is far more convenient than having to budget for the higher costs associated with the many other debts a borrower is trying to handle, and much less stressful. While these debt consolidation loan do extend for greater periods of time, the upside is that while the payments are lower, the borrow has much more flexibility in their cash-flow needs, and, as long as payments are kept up regularly and on time, this improved activity is quickly reflected in their credit scores. It also demonstrates better financial responsibility, which translates into the borrower moving from a high risk status to a medium risk status, and will clearly make all future borrowing needs, such as getting a mortgage loan, that much easier to solve.

How Does Debt Consolidation Work?

What is Debt Consolidation?

Each time an individual is extended credit, either from a financial institution or a business, the lender sets an annual percentage rate of interest (APR) that must be paid back along with the principal. When individuals open many lines of credit and begin to accumulate debt, each account will charge the customer their specific interest rate on top of the balance each month. In order to stay in good credit standing, the minimum payments must be made monthly to every account, but when each creditor is charging between 10-20% interest, it becomes difficult for individuals overcome the constant wave of interest that continually accrues.

Debt consolidation occurs when a debt management company takes control of all the accounts an individual owes on and presents the customer with only one bill, allowing interest to be charged to a single account, instead of multiple accounts with multiple APR rates. Debt consolidation experts communicate with the lenders and make deals to settle the remaining balance of the accounts, and then offer the customer a manageable monthly payment with a lower interest rate. When debt consolidators cancel the credit of their customers, they do so at a lower interest rate than the person was initially paying, which allows debt consolidators to pass the saving onto their customers. In many cases, the total amount of debt is reduced and customers save thousands of dollars in interest over time after choosing to consolidate their debt.

Who Could Benefit from Debt Consolidation?
  • Recent College Graduates – College is expensive and many graduates had to turn to private and government loans to pay tuition. Graduation doesn’t always mean big paychecks, so recent college grads can lower their student loan payments and interest by consolidating their debt.
  • People who make Minimum Monthly Payments – The more payments customers make, the more interest they end up paying out. Making the minimum monthly payment on multiple accounts only puts people further into debt. Debt consolidation customers only have to make a single payment every month, instead of four, five, or six.
  • Divorcees and Single Parents – Single incomes and multiple payments just don’t mix. Debt consolidation takes the money that would have been wasted on absorbent interest charges and puts it back into your wallet.
  • Anyone Struggling with Debt – Debt consolidation companies have the leverage and know-how to reduce the amount you pay each month and keep interest rates affordable, allowing their customers to regain financial control of their lives.

How does Debt Consolidation affect Credit Scores?

Credit scores are directly related to the amount of available credit an individual has. For instance, a person’s credit score is negatively affected when their accounts are maxed out, leaving no available credit. On the other hand, when accounts are paid out and closed, this too can negatively affect one’s credit score. If a debt consolidation company pays off and closes their customer’s accounts, then this could have a negative impact on their score. If the company pays off their customer’s debt, but keeps the lines of credit open, then the affect on their credit score is reduced.