What are the different debt consolidation options out there? There are basically two: loans and credit counseling. If your looking at how to get out of debt, they could be the answer to your debt problems. Here are a few things to look at when you are looking for some help with your debt:
LOANS
Pros
This is where you take you a consolidation loan that you then use to pay off your obligations. There are good and bad things about this option. The good thing is that you now only have to make one payment, since you only have one creditor. Therefore, it is easier to keep track of.
Many people have 10 creditors or more to keep track of. Therefore, it is almost impossible to figure out who to pay, and when. If you miss just one payment, you could be on the hook for some expensive late fees. At the very least, your FICO score can be docked 50-100 points.
In addition to it being easier to stay organized, the interest rates are also going to be lower on the loan payments. In the majority of these loans, you put your home up as collateral. This is known as a home equity line of credit.
In this case the interest rates will almost always be less than what you are paying you’re your unsecured debts. The reason is, you are using your home to protect the creditor in case you default. Since your other financing is not secured by a home, the interest rates are going to be more.
Therefore, you will be saving money every month when you take out a debt consolidation loan. This is one of the main reasons people get them.
Also, the interest rates on credit cards do not help with you taxes, whereas the interest you pay on a home equity line of credit can be written off. This can make a huge difference.
Cons
For one thing, it is not hard to dig yourself an even deeper hole. Now that you have lower monthly payments, you might start spending a lot with our credit card again, and therefore get yourself in the same mess you were in before.
Obviously in this instance you risk losing your home. After all, if you run up your credit card debt again, you very likely will struggle to make your minimum payments. Now, you have the debt consolidation loan on top of the credit card payments. This is a recipe for having your home foreclosed.
Also, these loans are generally very long term. This means you are going to be paying them off for a very long time. The majority of them last for ten to thirty years. In other words, it is very possible that the total on the debt consolidation loan is going to be higher, even if you are saving money each month.
CREDIT COUNSELING
This is where you hire a company to manage your finances for you. They are not loaning you money. Instead, you pay them a fee to watch over your finances, and ensure that everything gets to the proper creditor at the right time. This can be very good for helping organize your finances better.
There really are no cons to this strategy, as it is low risk, and is great for helping you get organized. In some instances it can lower your credit score a touch, but it does not impact it as much as something like personal bankruptcy.
Conclusion: these are the two debt consolidation options that are out there. In general, credit counseling is less risky, and for this reason is the better option for help with debt problems.
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