Debt consolidation services exist to work with people who get into trouble with too much debt. These companies consolidate their unsecured debts and work out more favorable payment programs.
A debt consolidation company will condense all your unsecured monthly bills into one bill at lower monthly payments. You can consolidate your debts through a debt management program or through a debt consolidation loan. Both a debt management program and a debt consolidation loan can help you easily make your payments without struggling.
Types of Debt Consolidation Services
The various options that are available to consolidate consumers debts have made the debt consolidation term quite confusing. The two common options are debt management programs or plans and consolidation loans.
Debt management plans are one of many repayment programs. If you enroll in such a plan the debt management company that you’re working with will call your creditors to negotiate repayment terms, reduce interest rates and it may even eliminate late fees and other charges. In this plan you send the firm one payment every month and they distribute the funds to your creditors.
Most of consolidation loans are home equity loans, which is the equity built up in your home loan. If you own a home you can get such a loan from a debt consolidation lender for repaying all of your unsecured debts. By getting a home equity loan you convert all of your current unsecured debts into a secured debt — backed by your home.
Pros and Cons of Debt Consolidation Services
Depending on whether you decide to get a consolidation loan, or go to a debt management, there are different pros and cons to credit consolidation.
If you decide to consolidate loans with a bank loan, you will first need to qualify for some form of loans. If you get a second mortgage or a home equity line of credit, you will be turning your unsecured debt into a debt secured against your home — if you cannot make your payments, your house can be taken.
A bank loan also means a new debt. As not all of your debt going away you have not always saved any money by doing this. However, consolidating with a bank loan does give you some peace of mind, as it will eliminate creditor calls and improve your credit score.
Consolidation through a debt management plan needs a longer process. Rather than shifting your debt you shift how you are paying that debt. One payment every month is a lot easier to keep track of than many. A credit counselor will often help you learn to handle your finances better, as well as help you negotiate for lower rates with your creditors.
The cons of debt consolidation through a debt management program is that while you are on the program, you cannot open any new accounts. Also, your credit score may temporarily go down. Some lenders may choose not to work with your credit counseling service, which can be inconvenient.
Before you choose to work with one of reputable debt consolidation services, do your research and be aware of the pros and cons of any program or service.