Pros and Cons of Debt Consolidation Solutions

By | January 14, 2014

It is easy to get into debt. XYZ Company offers you a credit card that seems too good to refuse. The next thing you know, ABC Company is offering you a credit line too. You get multiple offers in the mail so you take them and the next thing you know; you have the equivalent of a small mortgage in debt payments. All those credit lines you have accepted come with a hefty interest rate and you start having trouble making ends meet. Debt consolidation may be your best way out; however, it is important to remember that there are different types of debt consolidation solutions with their own benefits and drawbacks.

Personal Loans

If you have a good credit score, you may qualify for a personal loan. Taking out a personal loan allows you to pay off your individual debt and consolidate your monthly payments into one loan payment. If the loan has a lower interest rate than your credit cards, then you will money in interest. Additionally, if you make your payments on time, you may save money on fees for late payments or going over your credit line. Personal loans secured by some kind of asset such as your home offer rates that are more favorable. If you can get a co-signer with a good credit rating, that will help lower your interest rate too. The downside of this plan is that once you pay off your credit card balances, you cannot run them up again or you will just compound your debt problem. It also may be difficult for you to obtain a personal loan if you have high balances on your credit card accounts. However, if you can get a personal loan, it is one of the best ways to get out of debt and it actually will help boost your credit score.

Debt Consolidation Settlements

There are companies who can help you negotiate paying off your debit with creditors. For example, offers resources for finding companies who can reach settlement agreements with your creditors that allow you to pay less than you actually owe. The debt management company reaches agreements with all your creditors and puts you on a fixed repayment plan. After that, you send one monthly payment to the debt consolidation company and they disburse the money to your various credit card companies. This can be a very effective way to pay off debt, but any debts that you pay off using this method will show up as settlements on your credit reports. What this means is that your credit reports will reflect the fact that you paid less than what you actually owed on the debt; although, they do still show that the debt is paid. Keep in mind though that this is not a free service. Part of your monthly payment will go to the debt consolidation company. Sometimes debt consolidation companies require you to not only cancel your current credit card accounts, but also to agree not to open any new ones until after you have completed their program.

Debt Consolidation Loans

As a condition of getting a loan, the lender may require you to pay off your other creditors. This is a special kind of loan called a debt consolidation loan. Debt consolidation loans come with almost all of the advantages of personal loans, but the lender will only allow you to borrow the money if you agree to pay off and cancel your revolving credit lines. This can be both a blessing and a curse. A debt consolidation loan will help alleviate your debt problems, but it looks better on your credit if you can keep your existing credit card accounts open with low balances. However, if you feel that you are likely to starting using your credit cards again, then a debt consolidation loan will take that temptation away. Debt consolidations loans also relieve you from juggling various monthly payments by allowing you to make one loan payment towards your debt.

There are no easy answers when it comes to debt consolidation. No matter which type of debt consolidation solution you choose, it will only work if you make it work. You have to convince yourself that you want to get out of a debt and stick to your game plan. Getting halfway through a repayment plan and then failing to make the payments or taking out a loan that you cannot afford to pay back could put you in worse financial shape then when you started.

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