Understanding Debt Consolidation
Wednesday, August 5th, 2009 Subscribe To Our Feed
There are basically two options when you are asking, how does debt consolidation work. You have the option to use a debt consolidation loan or a credit counseling service, if you are looking for a way to consolidate your debt. The big difference in the two alternatives is one of them is a loan and the other is not.
How does debt consolidation work with a loan? A debt consolidation loan is usually secured with collateral and in most cases that is your home. While this is an alternative for getting out of debt, I do not consider it a good one. What happens is you will be paying off your debts with the equity in your home. You will ultimately be paying your debts in the form of a house payment. Your payments may be lower, because you are paying them off over a longer period of time. Your interest rate will be lower and the interest you pay will be tax deductible. The downside—if you default on the loan, the lender can foreclose on your home. According to financial experts, many people that take out debt consolidation loans will have credit card debt again within a year.
How does debt consolidation work with a credit counseling service? Your interest rates will be lowered as well as your fees being eliminated through the actions of the credit counseling serivice. The credit counseling company will disburse your single monthly payment to your lenders. Your collection calls will stop and your accounts will be closed, but your debt will go down. You do not have to enroll all your credit card accounts. This is a credit score friendly version of debt relief. The program normally takes about 5 years to complete. Credit counseling is a good alternative as long as it used early enough.
When consolidating debt, these two options are used most often. Careful consideration is required before selecting a debt relief option as this is not a one size fits all situation.
