Debt Consolidation vs Credit Counseling

Consumers who need to eliminate their debts may be able to do so with credit counseling. A credit counseling company reduces interest rates on people’s debts so that they can reduce their balances to zero in around five years.

The Advantages:

• With lower interest rates, people can afford to pay more than the minimum monthly payments
• Late fees and other charges may be removed
• They receive a lower, more easily affordable monthly payment

The Disadvantages:

• A reduction of the interest rates does not necessarily result in a significantly reduced monthly payment
• Credit counseling can be more expensive than other options
• The credit counseling repayment plan can take longer to complete than other solutions
• A lot of people find it difficult to remain on the program
• Credit counseling receives funding from credit card companies who may encourage these companies to work out deals that will be in the creditors’ favor

Secured Debt Consolidation Loans

Consumers who own a home may be able to qualify for a debt consolidation loan. They will receive a loan from the equity in their homes, often referred to as a second mortgage, and repay the money on a monthly basis for a predetermined term.

The Advantages:

• They receive one low monthly payment
• They have low interest rates because the house is offered as collateral

The Disadvantages:

• Some people may not be able to afford the payment
• The collateral may be lost to foreclosure if they default on their payments
• Not everyone can qualify for this type of loan

Unsecured Debt Consolidation Loans

Consumers who do not own a house or a car with enough equity to qualify for a secured debt consolidation loan may be able to obtain an unsecured debt consolidation loan. With this type of loan, the lender pays all or a portion of the borrower’s debts and receives payment every month.

The Advantages:

• Repayment is easy with just one monthly payment

The Disadvantages:

• Interest rates for unsecured loans will, most likely, be very high
• An unsecured debt consolidation loan often means that people have too much debt and will cause future lenders to refrain from extending credit in the future

Neram Lamatao is an internal essayist for Franklin Debt Relief. She writes an article about debt relief, credit card debt reduction and getting out of debt on a selection of financial sites online.

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