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.
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 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.
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.
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.
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.