There are lots of types of debt consolidation options; each with its own set of pros and cons. Some of the most common include debt consolidation loans, debt settlement, credit counseling and bankruptcy. It is essential to determine which type of debt consolidation plan is best suited for your requirements and understand the related risks.
Debt consolidation loans are usually home equity loans. This type of funding requires the homeowner to get another mortgage note using the equity in their home as collateral. Consolidation loans can be used to repay outstanding credit card balances, personal and student loans, and other forms of unsecured debts.
Debtors transfer their debts into the home equity loan. Rather than making monthly payments to several creditors, one large payment is made to the debt consolidation lender. While this may seem to be a fantastic solution, unsecured loans converted to a home equity loan might cause more problems than it solves.
First of all, the equity in your home is depleted to pay for unsecured loans. Through refinancing debts and moving them into a single loan, repayment provisions are extended, increasing the amount of time required to repay debts.
Home equity loans are usually repaid over a period of 10 to 15 years, whereas unsecured loans are repaid over 3 to 5 years. The additional interest can add up to a considerable chunk of change.
Second, home equity loans are secured by your home. If you become delinquent on the second mortgage, the lender can initiate foreclosure. Careful consideration needs to be given before placing your home on the line to reimburse creditors.
Debt settlement involves negotiating with lenders to accept a lesser amount than is owed. On occasion, debt settlement can be negotiated with the debtor. However, the majority of consumers require the assistance of a professional debt settlement company or attorney.
Debt settlement aims to slash the debt owed by offering an upfront lump sum payment. Also called debt arbitration, debt settlement can reduce outstanding debt balances up to 50-percent.
Bear in mind credit card companies don’t like debt settlement. In some instances, creditors can resist all discussions and initiate a lawsuit against you if you’re unable to pay the total amount. However, if you’re in deep financial trouble credit card companies prefer to receive something vs. nothing. If you’re at the bankruptcy-point, debt settlement might be an avenue worth exploring. Otherwise, consider credit counseling or other debt management choices.
Credit counseling provides debtors with the chance to review their financial situation thoroughly. Credit counselors can evaluate the debtor’s financial standing, provide suggestions and assist in creditor negotiations. Reputable credit counseling services are connected to the credit industry and can sometimes assist debtor’s get lower rates of interest or re-age past due accounts to improve credit ratings.
Two different types of credit counseling agencies exist – non-profit and for-profit. Non-profit agencies typically charge fees based on a sliding scale element. For-profit credit counselors charge a startup fee and monthly fee that is payable until outstanding debts are paid in full.
It is critical to conduct research when selecting any debt consolidation firm. Be certain you’re working with a reputable organization in good standing with the Better Business Bureau. The Internet is a great resource for assessing credentials and finding complaints. Engaging in due diligence can prevent you from spending your hard earned cash on a bogus company that cannot deliver what they promise.