National Debt Relief - BBB Accredited Business - Get Relief From Unsecured Credit Card Debt, Medical Bills And Student Loans

4 Pitfalls Of Debt Consolidation Loans

When you are considering consolidating your multiple debts, one of the first options that come to mind is to use a loan. Although debt consolidation could also mean debt management or balance transfer, it is defined by Investopedia.com as “the act of combining several loans or liabilities into one loan.” That refers mainly to debt consolidation loans.

That simply means you, as the debtor, will take out a master loan that is enough to cover your multiple credit obligations. The goal is one of two things: a simple payment plan or a lower monthly contribution cause by either a lower interest rate or a longer payment period.

In most cases, people who have no idea what debt relief is all about immediately consider this process as a viable solution. It seems like the logical way to put some order into a seemingly difficult debt situation.

4 risks of using a loan to consolidate debt

burning house of cashBut while debt consolidation is a great option to get out of debt but there are a couple of pitfalls that you need to think about. It is proven that debt consolidation loans can fix your multiple problems with debt but you have to take note of these 4 risks.

  1. False sense that you have solved the credit situation. When you get your loan, your next task is to pay for your multiple debt obligations. After all, that is how you consolidate your debt. However, some people get the false sense that they already paid off their debts. When you think about it, you only shifted your debts around. The money that you used to pay for the multiple credit account is still debt. You have to pay that back. Unless you have to paid for the debt, you should not feel that you have already solved your credit problem.

  2. Opting for a high interest rate loan. When you use debt consolidation loans, you have to target a low interest rate. If you cannot do this, you will end up paying more in the long run – as compared to getting a lower rate. It defeats the purpose of using this type of debt solution as it will not make your situation better. It could simplify your debt payment but it will not really save you any money.

  3. Endangering your personal assets. For people who do not have a good credit score to qualify for a low interest rate, they opt to put their personal assets on the line to get a secured loan. While this will guarantee the low rate, it will endanger their homes, cars or other valuable assets. If they cannot pay off the loan, the lender could get these collateral as alternative payments.

  4. Temptation to get more credit. Most of the time, the multiple accounts that you are paying off immediately are credit card accounts. Once you have paid this off with the loan, the temptation to use them again will be very high. You should not give in to this urge because you still owe the same amount of debt. It is just consolidated under one lender.

If you really want to use debt consolidation loans as your means to get out of debt, you have to be very careful of these pitfalls. When you know the risks, you can plan your debt solution to try to avoid them.

How to avoid the pitfalls of credit consolidation loans

Now that you know what you should avoid, you can construct your plans so that you can make this debt solution effective. Here are three things that you can do to guarantee success.

  • Create a debt payment plan. The pitfall that this will address is the first and the last. You want to make sure that you have a plan for the payment of the master loan. This plan will keep you from forgetting that your debt is still technically, not paid. This plan can also help you gain direction on your quest for debt freedom.

  • Check your loan options. It is very important to choose the type of loan that you will get. For instance, you have unsecured or secured loans. You also have peer to peer lending or family loans as your option. These all have their pros and cons and you can make a smart choice about your debt solution if you know your options.

  • Know if you qualify. If you do not have a good credit score or a collateral to make your loan interest rate low, you need to reconsider if this is the right debt solution for you. There are other options like debt management that will not require you to have a good credit score or a collateral. But you can still benefit from the single payment scheme and lower monthly contribution of debt consolidation.

Like all debt solutions, debt consolidation loans can only be effective if you know how to treat it properly. You want to make sure that you understand the processes and rules so you can maximize the benefits that will help you gain faster debt freedom. Not only that, you want to be able to know the tools that will make the journey bearable. Go on a road to self education. You need to start learning how to manage your money properly. That is how you can really move past your debt crisis.

9 Tips for A Debt Consolidating Loan

How To Make Debt Consolidation Loan EffectiveAssuming you haven’t been living in a cave for the past five years, you’ve undoubtedly seen or heard those ads for debt consolidation that will “cut your payments by 50%,” or “help you get out of debt fast.” And yes, consolidating all of your high interest loans and credit card debts into a single loan that has a lower interest rate and better payments does make good sense. However, it’s important to understand that it doesn’t always end up that way. There are numerous people who have done a consolidation loan but ended up paying a lot more than they would have otherwise. Plus, in the case of a home equity loan, there are a surprising number of borrowers who have ended up losing their homes. You could profit from debt consolidation but you do need to proceed with caution. Here are some tips that could help you do just that.

1. Order your credit reports and FICA score

Any loan that you are able to get will be based mostly on your credit score so you need to know what it is. If you find that you have a fairly good score and a reasonable credit rating, you will be able to consolidate your loans at a better rate.

2. Check out your other options

Before you sign up for a debt consolidation loan, it pays to check out your other options. If you’re not in terrible trouble and just want to save money, your best answer might be to simply pay off your debts as quickly as you can by prioritizing them. Review your loans to see which one has the highest interest rate. Do everything you can to pay it off first while still making the minimum monthly payments on your other debts. You could also contact your credit card companies and possibly negotiate lower interest rates. Finally, consumer credit counseling has helped many families with free or low-cost counseling on how to manage debt and prepare a budget.

3. Know the differences between a consolidation loan, debt negotiation and a debt management plan

There are companies online that claim they can lower your payments and get you out of debt fast with consolidation loans. However, they might be using methods such as debt settlement, debt management or even bankruptcy. So, it’s important to understand the differences between these. As you might guess, a debt consolidation loan is one where you borrow money and pay off your other loans. You could also reduce your payments through a debt management program but this works differently. This is where a credit counseling agency or debt management company serves as the middleman between you and your lenders and attempts to negotiate reductions in your interest rates or fees on your loans. Each month, you then pay the credit counseling agency or debt management company. It then distributes the money to your creditors. Finally, debt negotiation is where you settle a debt for less than what’s owed. In this instance, you pay a part of your balance to your creditor and it writes off the rest of your debt.

If you’d like additional information on the options available to a debt consolidation loan, watch this video.

4. Try to pay off your debt as quickly as you can

While a debt consolidation loan should be able to get you a lower monthly payment, this is because you’re spreading your repayment over a much longer amount of time. This means it’s likely that you’ll pay more in interest charges than you would have paid otherwise.

5. Get the right loan

It’s possible to get a secured loan, which is one that is backed by some asset as collateral or an unsecured loan that is also often called a personal loan. Secured loans are usually secured lines of credit, home equity loans or second mortgages. They generally have lower interest rates than an unsecured loan because they are less risky for the lender. If you were to default, it could recoup its money by selling the asset. Plus, it’s possible that a home equity loan would be tax deductible. But do carefully consider the risks before getting any type of secured loan. Also, check to make sure it doesn’t include some hidden fees such as “points.” A safer option is an unsecured loan because you’re not required to risk your house or any other asset. But to get a decent rate on an unsecured loan you would need to have pretty good credit.

6. Comparison shop

Don’t sign up for the first debt consolidation loan you’re offered. Get quotes from several different companies and then compare the interest rates and terms carefully. It’s possible that your own credit union or bank will be your best bet – especially for personal loans. Get all quotes in writing so that you can compare several different lenders side-by-side.

7. Read your contract carefullyWoman holding glasses and reviewing credit card statement

Before you sign a contract for a debt consolidatng loan make sure you read every word in the contract and then read it again. If you have questions ask them and make sure you understand the answers even if you have to ask several times. If you’re in doubt about anything hire a lawyer or get another independent source to take a look at the contract for you. There can be things that seem insignificant but end up costing you thousands of dollars or even your house. So practice due diligence

8. Don’t pay for credit insurance

There are lenders who will try to pressure you into buying credit insurance. They may even imply that if you don’t sign up for it your application will be rejected or worse yet, they may attempt to hide the cost from you. If a lender tries this, get out of there fast and file a complaint with the appropriate authorities in your state. Credit insurance can add a huge cost to your loan and it usually offers very little protection.m

9. Finalize the loan process

You need to do the complete application process, which should be straightforward but may take some time and work. If at the end of the process you find your loan rate is not that which you were quoted, ask why. And then check with your next best option. Don’t get taken in by what’s called the old “bait-and-switch.”

What To Do If You Can’t Qualify For A Debt Consolidation Loan

frustrated womanYou’re having a hard time with your debts and you’ve tried to get a debt consolidation loan. Unfortunately, you don’t have enough equity in your home to get either a home equity loan or home equity line of credit. You applied for an unsecured loan at your bank or credit union but were turned down. You’re receiving calls from a debt collector nearly every day and you’re at your wits’ end. So what can you do? Here are eight suggestions for what to do when you can’t get a conventional loan.

Look for a bad credit loan

There are companies that specialize in loaning money to people who have bad credit. You can find them by going online and searching on the term “bad credit loans.” In fact, there is even a website the www.badcreditloans.com as well as www.247lendinggroup.com. Other sites with loans for people with bad credit include Springleaf Financial and Avant Credit. Be forewarned that most of these sites won’t loan more than $5,000 and their loans usually come with very high interest rates.

Try for a peer-to-peer loan

Peer-to-peer lending is where you borrow money directly from a person or group of people with no third-party financial institution involved. The number one site for this type of lending is www.lendingclub.com, which offers unsecured (personal) loans up to $35,000. Another popular peer-to-peer lender is www.prosper.com. If you have poor credit, you may not be able to get a peer-to-peer loan but it would certainly be worth trying.

Get a payday loan

If you’re short only a few hundred dollars and have steady employment, you could get a payday loan. This is where you write a check to the lender for the amount you need, plus its fee and get cash in return. The payday lender will then cash the check on your next payday – hence the term payday loan. This means you will need to have enough money in your checking account to cover that check or your loan will be automatically rolled over and you will be charged another fee.

Tap friends or family members

This isn’t a very popular option because it’s difficult to go to a family member or friend and basically beg for money. However, it is definitely a way to get a loan when you have bad credit. If you go this route just make sure that you treat the loan just as if it was a bank loan. Write out a contract spelling out how you will repay the money and the interest rate you will pay – because you actually do need to pay interest on that money. The good part of this is that you certainly won’t have to pay as much interest as if you had a bad credit loan. And do make sure that you pay back the money as you had agreed to and on time.

Pawn something

Again if you only need $500 or less you might be able to pawn something. The advantages to this are that you get the money immediately and that you could get the asset back by paying off the “loan” – usually within 30 days.

Look for a second jobWhat You Can Learn From Successful People About Debt Freedom

Could you take on additional shifts where you now work? If not, you should be able to get a part-time job. The food service and hospitality industries are almost always looking for people who would be willing to work 15 or 20 hours a week. These types of jobs rarely pay much more than $8 or $10 an hour but if you use all the money you earn to pay off your debts you could be debt free in maybe two years or less.

Try to settle your debts

If you’re nearly six months behind in your payments, you could contact your lenders and attempt to settle your debts for less than you owe. To do this means contacting each of them individually and making a settlement offer for 40% or 50% of what you owe. In many cases you will be able to negotiate a favorable settlement because the lender would rather get “half a loaf” then see you declare bankruptcy where it would get nothing. You have to be a reasonably good negotiator to pull this off. Your lenders will want immediate payment so you also need to have the cash in hand to pay for your settlements.

Hire a professional debt settlement company

Most people choose to hire a debt settlement company instead of attempting to negotiate settlements themselves. There are two important reasons for this. First, a debt settlement company like National Debt Relief has skilled and experienced counselors that are almost always able to negotiate better settlements than you would be able to do yourself. And second, this removes the need to have the cash available to pay for your settlements. What would happen instead is that the debt settlement company would settle your debts and you would then have a monthly payment plan that should have you debt free in two to four years.

Start rebuilding your credit

Whichever of these options you choose, it’s important that you also start rebuilding your credit. One way to do this is by getting a debit card tied to your checking or savings account. If you use the card sensibly this will be reported to the three credit bureaus and will eventually have a positive effect on your credit score. If you elect to get one of these cards just make sure that how you use is reported to the credit bureaus.

You can do other things to improve your credit as revealed in this video.

3-Part Process Of Debt Consolidation Loan

two men applying for a loanIf you want to consolidate debt on your own, one of the obvious ways to do that is through debt consolidation loan. Sometimes, people do not really need professional help or debt reduction. All they need is a restructured payment plan that will make it easier for them to pay down their debts without supervision.

However, you have to be warned that not everyone who goes through debt consolidation loan is successful. There are many reasons to this and instead of identifying them, we will give you the solution instead. It all comes down to how you implement this debt relief program.

Debt consolidation loan goes through 3 distinct parts. The problem with some people is they skip some parts or pay less attention to the others. This is a mistake. You have to go through each part completely so make sure that you have all the bases covered in debt consolidation loan.

Part 1: Pre-debt consolidation loan preparations

The first part of the debt consolidation loan process happens just before you make the loan application. This is actually what most people skip or breeze through. They fail to analyze carefully if this debt solution is indeed the right way to solve their problems. If you make this mistake, it could be one of the reasons why you will fail in this debt relief program. So try not to skip through this step and take your time in considering your options.

Here are the three important steps in the first part of debt consolidation loan.

  1. Analyze your debts. This analysis is not really to determine if your debt qualifies for this debt relief program. This is one of the debt solutions that can take on almost all types of credit accounts. However, you need to consider any prepayment penalties that some of your debts may have.

  2. Make a budget and payment plan. Some people will only work on a budget or a payment plan. We suggest that you do both. The budget plan will help ensure that you have funds for the loan that you will make. The payment plan will identify the debts that you will pay off with the loan.

  3. Do the math. The last step in this part is making the necessary calculations that will help you determine if your finances can really afford this debt relief program. If it turns out that you cannot, you may have to opt for a different debt solution – like those that will give you a debt reduction. This should be easy to do because there are debt consolidation calculators online – like those from Bankrate.com or Money.MSN.com.

Only when you have gone through these steps should you continue on to the next part of debt consolidation loan.

Part 2: Going through the loan application process

The second part is going through the whole loan application process. If part 1 convinces you that debt consolidation loan is the right debt solution, then you can proceed to the following steps.

  1. Know the type of loan that you will borrow. Your goal in debt consolidation loan is to find a low interest loan that will replace the high interest ones that you owe. This means you need to know the different type of loans that you can get. You can opt for personal loans, secured loans or peer to peer lending. Make sure you end up with a loan that you qualify for and you have the best chances of paying off.

  2. Look for the right lender. Even as you search for the right loan, you will notice that there are also several lending institutions that you need to choose from. When you know the loan that you will borrow, look for a lender that will give you the best debt consolidation loan rates and terms. You can call lenders or compare their rates online.

  3. Find out the requirements. When you have the prospect lender, find out the requirements for the loan and prepare the documents. Complete the application form and submit it to the lender.

  4. Be ready with the loan costs. When you get a loan, it usually comes with certain costs because the lender will incur them when they check your credit worthiness. All of these will have to be paid too.

Be careful when you make your selection. Make sure you select the loan from a lender that will give you the most ideal payment plan that will make it easier for you to pay down your debts. When you have accomplished these, only then can you proceed to part 3.

Part 3: Consolidating debts with the approved loan amount

The last part is also the phase in debt consolidation that some people do not take seriously. This is actually where most of the pitfalls of this debt solution happens. Ensure that you will follow everything that we will discuss in this part. It all begins when the loan is released to you by the lender.

  1. Pay off your debts as planned. As soon as you get the loan amount, use it to pay off the debts indicated in your payment plan. This is important because holding on to the money for long will tempt you to use it on something else.

  2. Create a payment plan for the one loan you will make. This plan will help you monitor when payments are made and the progress that you have accomplished. It is important to keep yourself from being late on payments so your credit score improves as you pay down your debts.

  3. Stop accumulating debts. One of the downfalls of debt consolidation loan is the temptation to use the recently paid credit cards. Most of the time, people will think that their debts were not as bad as before and they end up falling back on their debt habits once more. Do not let this happen and keep a tight rein on your spending habits.

These are the processes involved in debt consolidation loan. Follow them strictly so you can achieve debt freedom through debt consolidation loan.

On a last note, we encourage you to use National Debt Relief’s Debt Consolidation Professional Plan to help you understand if your unique financial situation will benefit best from debt consolidation loan.

What Is The Best Alternative To Debt Consolidation Loan?

man carrying debtUsing debt consolidation loan as a debt solution is the first option that consumers usually think of when they are faced with mounting credit obligations. In truth, this is an effective option but only if you have the right qualifications and attitude towards it.

Some financial experts doubt the effectiveness of using one debt to pay for another. It is not really viewed as a solution because you are merely shifting your dues so your payments will not be as difficult as before. Instead of dealing with multiple creditors, you apply for a loan that is big enough to pay for all your other debts. That way, you will be left with only one lender and debt to pay for month on month.

However, there are a couple of things that you have to consider before you choose this as your debt solution. First of all, you must possess either a good credit score or a collateral to avail of a low interest loan. This will ensure that your monthly payments will be smaller than your current. But if you do not have both, you may want to consider other debt relief programs that can give you better results based on the qualifications that you have.

Instead of consolidating with loans, use Debt Management

If you think that your qualifications are ill-suited for debt consolidation loan, you may want to consider debt management instead. The latter is another type of consolidating debts but this time, no loan is required to make it possible. Instead of a loan helping you to combine what you owe, a credit counselor will be used instead. Here are important points that you need to know about debt management.

  • The program begins with credit counseling wherein the credit counselor will analyze your finances and debts to see how you can best solve it.

  • Once the data is analyzed, the credit counselor will discuss with you the different options that you have in terms of debt relief.

  • If you qualify for debt management, the counselor will discuss the process and the fees that you will go through.

  • When you agree to use debt management, you will create a debt management plan or DMP that will contain your suggested low monthly payment scheme. The low payment will be possible because the counselor will lengthen your payment period.

  • The counselor will give the DMP to creditors to approval and will negotiate on your behalf for the lowering of your interest rate. If they agree, that will mean more of the monthly payments will be used to pay off the principal debt.

  • Once approved, you will send the total monthly payment to the counselor who will take care of disbursing the payments to your different creditors.

The benefit of this is you don’t need to have a good credit score or a collateral. However, the lower interest is not really guaranteed – but the counselor will put their best effort to provide this.

Of course, the lynchpin here is to find a trustworthy and reliable credit counseling agency that will help you out. To find them, you may want to start your search by going to the membership list of the National Foundation for Credit Counseling or the NFCC. Reputable organizations such as this will help link you to legitimate counseling agencies that can assist you in getting out of your credit problems.

Another important reminder is you should have a steady income. There is no debt reduction here and if you cannot afford the payment, debt management will not work for you.

When making a loan to pay for debt is not enough

In case you need a debt reduction because your income is not enough, the best alternative for debt consolidation loan is debt settlement. There are several benefits to a debt settlement plan. When you decide to use this as a debt relief option, here are the things that you should know about it.

  • Debt settlement works best for unsecured debt like credit card debt, medical bills and other personal loans.

  • Debt settlement will require you to default on your payments intentionally to help convince the creditor that you are in a financial crisis.

  • The default on monthly payments will lower your credit score but will allow you to save up for a settlement fund.

  • The settlement fund will be used to negotiate with creditors. You will ask them for a debt reduction by offering an amount that is lower than what you owe. You will tell them that you can only afford to pay this amount and if they cannot accept, you will be forced to petition for bankruptcy.

  • During the negotiation, you will start with an amount that is lower than what you have on your settlement fund. This will give you room to negotiate.

  • Once you and the creditor agree on a settlement amount, make sure you hold a document that states the forgiveness of the debt balance once you have paid the agreed amount.

This program is quite stressful but you have the option to hire a debt professional to help you out. Just like with a credit counseling agency, you may want to start your search by looking at trustworthy debt settlement companies through a reputable organization. One of them is the AFCC or the American Fair Credit Council. Look at the members to see who among the companies on the list you can work with.

If you want to know more about how you can do your own debt settlement, here is a video that we have created for you. Watch it to know how you can be successful in settling your own debts.

The Debt Consolidation Mistake Made By Millions Of Americans


There’s one simple reason why the overwhelming majority of people get into debt. It’s because they spend more than they earn. Does this sound too simplistic? It might but it’s true. When you spend more than you earn your only option is to use credit to get by and using credit means creating debt. As you use more and more credit you create more and more debt until the day comes when you absolutely must do something about it or declare bankruptcy.

A debt consolidation loan can be very tempting

When many Americans have found themselves overburdened by debt they’ve turned to debt consolidation loans because they see them as the only solution. And getting a debt consolidation loan can be very tempting. You get the loan and immediately use its proceeds to pay off all of your debts simultaneously. All those creditors or even debt collectors that have been hounding you go away instantly. Your brand new loan will likely have a much lower interest rate than your current debts and a dramatically lower monthly payment.

The big mistakewoman making financial decisions

There are two problems with this. The first is that a debt consolidation loan does nothing to reduce your debts. You may feel good about what you’ve done in the sense that your debts have become more manageable but you will have the same amount of debt as before. All you’ve really done is move your debt from one set of creditors to a new one. The second is not realizing that there are other options for taking control of your debts that could be better than getting a loan.

The options

  • Create a budget
  • Pay off one card at a time
  • Contact a credit-counseling agency
  • Negotiate with your creditors
  • Contract with a debt settlement company
  • Declare bankruptcy

Why create a budget?

Creating a budget can sound nasty, time-consuming and onerous. But it doesn’t have to be. There are numerous smart phone apps now available that make tracking expenses and making a budget about as complicated as falling off a log. The important thing about a budget is that it can help you learn where you could cut your spending and use the money you free up to pay down your debts. Most people who’ve gone through the exercise of tracking their expenses, categorizing them and then finding “leakages,” (places where they are spending money unnecessarily) have learned that they could cut their spending by $300, $400 or more a month. If you were able to do this and use that money to pay down your debts, you might be surprised at how quickly you could become debt free.

Pay off one card at a time

This may also sound too simplistic but one way to get out of debt is to do everything you can to pay off one of your debts, which will free up money you could then use to pay off a second debt. You could accelerate this process by using the strategy called snowballing your debts. We have seen people who have been able to pay off as much as $50,000 in debt in just a couple of years using this strategy.

Get with a credit counseling agencyWhat To Do During Your Pre-Retirement Years

Credit counseling can be an excellent way to get debts under control and ultimately paid off. Plus, a good credit-counseling agency will review all of your finances, help you understand where you’re making mistakes and work with you to develop a budget. The best of these agencies are nonprofits and charge practically nothing for their services. The credit counselor you will be assigned will probably even work with your creditors to get your interest rates reduced.

Negotiate with your creditors

Believe it or not you can negotiate with many lenders. This can be especially true with credit card companies. It may take some time and effort to find the right person to negotiate with but when you do you may be able to get a reduction in your interest rate or even a two or three month timeout during which you would not be required to make any payments at all – which would give you time to get your debts under control.

Settle your debts

The truth is you can actually do debt settlement yourself. What it amounts to is contacting all of your creditors and attempting to negotiate settlements for much less than you owe – with the promise that you will immediately pay them. You will need to be a good negotiator to pull this off and, of course, will need to have the cash on hand to pay your settlements. For more information about negotiating with with your creditors, watch his video.

Hire a debt settlement company

These are some good reasons why many people choose to contract with a debt settlement company to negotiate for them. For one thing, most people do not have enough cash on hand to pay for their settlements. Second, debt settlement companies generally have experienced debt counselors that have good relationships with the credit card and loan companies and can negotiate better settlements than individuals could do themselves.

Declare bankruptcy

If you’ve reached a point with your debts where you just can’t see any way out and none of these options seem doable, you could declare bankruptcy. If you were to file for a chapter 7 bankruptcy you could get most of your unsecured debts discharged such as credit card debts, medical bills and personal loans. But you should do your research and understand both the pros and cons before you file. There are some very serious consequences to a chapter 7 bankruptcy and it’s important to understand what they are.

 

Could A Debt Consolidation Loan Be Your Ticket Out Of Debt Hell?

Surviving Debt Despite UnemploymentThe poet and wit Ogden Nash once wrote, “Some debts are fun when you are acquiring them, but none are fun when you okay and in trouble financially and in France at an early and in about retiring them.” It’s even less fun if you’ve succeeded in acquiring a lot of debt and can’t see any way to retire it. In fact, if you’re seriously in debt and by this we mean you have a mountain of credit card debt and are struggling to make just your minimum payments, life can be a living hell.

Why take out a debt consolidation loan?

Thousands if not millions of American families have used debt consolidation loans to get out of debt hell. If you were able to get a loan large enough to pay off all of your debts, this would be almost an instant solution to your problems. It would eliminate all of those creditors or debt collectors who have been harassing you unmercifully as you would be able to pay them off immediately. Your life could become much less stressful, you could sleep better at night and when you woke up in the morning, you would have a brighter day ahead. Your debts would become more manageable and you should have a new peace of mind.

The benefits of a debt consolidation loan

Debt consolidation loans generally come with longer terms. As a result, they normally have a significantly lower monthly payment. You should also have a lower interest rate than the average interest rate of your current debts. It will be easier for you to manage your debt because you would have only one monthly payment to make instead of having to remember and make multiple payments. Last but not least, a debt consolidation loan can mean a sort of timeout during which you could repair your credit.

The two types of debt consolidation loans

Debt consolidation loans come in two flavors – secured and unsecured. If you were carrying a really big debt such as $20,000 or more, your best bet would probably be a secured loan. This is one where you are required to put up some asset as security. For most people this means their houses. You might be able to get a homeowner’s equity life of credit or a refi – which means a new mortgage. Given today’s mortgage rates of 4% or below, a refi could make a great deal of sense as you would surely end up with a much lower monthly payment than the sum of the payments you’re currently making.

The downside of a secured loan

The biggest downside of a secured loan is that it puts whatever asset you use as collateral at risk. For example, if you were to pledge your home as collateral and defaulted on the loan, your lender could foreclose on it and you might literally end up homeless.

The second type of debt consolidation loan

Unsecured loans are just that – loans for you are not required to provide any collateral or security. If you owe less than $20,000 this might be a good option. However, do keep in mind that banks are often hesitant about loaning money to people who are already having a problem with debt. Fortunately, there is a new form of lending called peer-to-peer lending where you might be able to borrow enough money to pay off all of your other debts. However, this is an area where you need to be careful because some of the online peer-to-peer lenders charge outrageously high interest rates.

The biggest negative

The biggest problem with using a debt consolidation loan to pay off debts is that you may not be able to get one. If you have bad credit and don’t own a house or some other valuable asset you could use as collateral, you might be out of luck.

Other options for paying off that debt

Of course, there are other options for paying off your debts besides a consolidation loan. For example, you could sign up for consumer credit counseling. This is where you go to an agency or company and are assigned a debt counselor who reviews all of your finances and helps you develop a plan for managing your debts. This is also a form of debt consolidation because your debt counselor will submit your debt management plans to all of your lenders. If they sign off on it, you will no longer be required to pay them. Instead, you will send the credit-counseling agency or company a check a month until you complete your plan.

Debt settlementHow To Be Smart With Debt Relief

A third way to pay off debts that’s become increasingly popular over the past few years is through debt settlement or what’s sometimes called debt negotiation. This is something you may be able to do yourself or you may need to hire a debt settlement company. If you want to do this yourself, it means contacting all of your creditors and negotiating settlements for much less than you owe. However you won’t find your creditors very anxious to settle unless you’re at least six months in arrears on your payments. You also need to be able to convince them that settlement is in their best interests because if they don’t agree your only other option would be to file for bankruptcy.

If you’d like more information on settling debt with your original creditors check out this video.

company

Most people find the idea of negotiating with creditors so nerve racking that they elect to contract with a debt settlement company. There are several advantages to this, not the least of which is that companies such as National Debt Relief have debt counselors with years of experience negotiating with lenders and are almost always able to get better settlements then people can do themselves. In addition, if you hire a debt settlement company this eliminates the need to have enough cash available to pay any settlements you would be able to negotiate yourself. Plus, debt settlement is another form of debt consolidation in that once all your debts have been settled, you would no longer be required to pay your lenders, as the debt settlement company would have assumed responsibility for that.

Other tips for paying off debt

Here are some tips for paying off debt you might find helpful.

  • Make more than the minimum payments on your debts
  • Snowball your debt payments
  • Cash out your savings account
  • Borrow from your life insurance policy
  • Hit up friends and family
  • Tap your 401(k)
  • Renegotiate terms with your lenders
  • File for bankrupty – the last resort

How Each Debt Relief Program Affects Your Credit Score

man jumping with chart behindYour credit score has grown to be one of the most important figures that you will have to monitor in your financial life. Some people think that this is only for those who plan to take out a loan. It may be true that this will help paint you as a low risk borrower and will prompt the lender to give you a low interest on your loan. However, the effects will not stop there. It is also important because it will pave the way for you to enjoy various financial opportunities like better employment and even renting opportunities.

If you are in debt and you have been struggling with your payments, you can expect that your credit score have gone down. The extent of the damage will depend on your overall debt situation. While paying off your debt may be the priority right now, you need to think about fixing your credit ranking too.

This is why you need to make your debt relief choice depending on how much you can afford to sacrifice your score.

Debt consolidation has the least effect of credit reports

Among the debt relief options, debt consolidation has the least effect on your score. The options will also help you fix your score as you go through the whole process. The reason why this hardly has an effect is because you will still end up paying for all of your debts. That will not give the creditor any reason to put a negative entry in your credit report.

Here are the options that you have if you want to keep your credit score from being ruined.

  • Debt consolidation loan. This type of debt relief program involves getting out of debt through a loan that you will use to payoff your multiple debts. You will benefit from this because you will have a single and lower monthly payment. This happens because you will be getting a low interest on the loan that you will use to pay off your other debts. Not only that, loan terms are usually longer so your balance will be stretched over a longer payment period. This debt relief option may affect your score a little because the lender will have to get a copy of your credit report and that means an inquiry will reflect on your score. Not only that, your report will show a big debt amount – but this will only be for awhile. Once you get the loan, you will pay off the other debts completely and while that will not lower your score immediately, it will have a positive effect eventually. And since you only have a single and lower payment, the chances of you displaying good payment behavior is more likely to happen. That will boost your credit score slowly but surely. To maximize this option, you need that low interest and that requires a good credit score or a collateral. While there are loans for people with bad credit, this is not really advisable.

  • Debt management. In case you do not like using a loan, debt management is another option to consolidate debt. This involves a credit counselor who will help you by creating a debt management plan (DMP) for you. This plan contains your lower monthly payment proposal which is made possible not because you asked for a reduction, but because you stretched it over a longer payment period. This plan will be showed to your creditor and the counselor will also ask for a lower interest rate – but that is as far as their negotiations will go. Once the DMP is approved, you will send a single monthly payment to the counselor who will take charge of getting the respective payments to your creditors. This option will not have much effect on your score because there will be no inquiry on your report and your debt amount will remain the same. Not only that, the counselor will help make sure that you will not use your cards while in the program and that will keep you from incurring more debts.

Although these two can take care of your credit rating, you need to go through a longer payment period – around 5 years or less. Also, the lack of debt reduction may have kept your score intact but that also means you need a steady income to support your payments. If that is not possible, you may have to opt for other debt solutions.

Debt relief programs that can lower your credit score

In some cases, people really need a debt reduction simply because they do not have the money to pay all of their debts. It can be caused by job loss or an ongoing medical treatment. Anyway, there are debt relief programs that can arrange much lower payments but that could result in a negative entry in your credit report.

Here are your options.

  • Debt settlement. This debt reduction aims to convince the creditor that you are in a financial crisis so they will allow you to pay only a portion of your debts. Once you have paid that part off, the rest of your debts will be forgiven. You can probably understand how that will make your creditors hesitant to settle with you. The effect of this process on your credit score is when you default on your payments. To convince the creditor that you are in a financial crisis, you have to intentionally stop paying your monthly dues. Instead of paying your debt, you will put it aside, in a separate and secure account. You will grow that to be your settlement payment. This will lower your score because later payments affect 35% of your debt. And if you are dealing with credit cards, that would mean your debts will continue to increase as interest and late penalty charges will grow your balance. That affects your debt amount – which is 30% of your credit score. This is how your credit rating will be affected. If you will hire a professional to help with this program, you need to make sure it will be with a reliable company. To find legitimate debt settlement companies, you want to look for duly accredited ones and those who are members of reputable organizations like the AFCC or American Fair Credit Council.

  • Bankruptcy. The last option, and usually the last resort of people in debt is bankruptcy because it can lower your score for at least 200 points. This is because bankruptcy means you have put yourself in the lowest financial position that has no other way to recover except to have your debts discharged. When you go through this, future lenders and even potential employers and business partners may find you to be a risky investment. It signifies that you cannot be trusted with money. That is all reflected in your credit report. You need to think about all of this when you apply for bankruptcy.

While these credit score implications may be scary, remember that you can improve it. Bankruptcy filers may have a hard time in the next decade or so but if they really do not have a choice in terms of their financial capabilities, they need to face the facts. It may be difficult but there is a way to improve your credit score – even after bankruptcy.

How To Make Debt Consolidation Loan Effective

How To Make Debt Consolidation Loan EffectiveDebt consolidation loan is probably one of the most controversial among the other debt solutions. The reason for this is it is what most borrowers think of first as a DIY debt relief program but financial experts will not encourage you to do it. Using a debt to cover another debt just seems ridiculous and illogical somehow.

But if you analyze it carefully, there are benefits to it and the structured single payment scheme is more appealing than having to deal with confusing multiple debts. You get to enjoy the following:

  • lower monthly contribution

  • longer payment period

  • lower interest rate

  • easier single payment plan

  • paying off the debt while increasing credit ratings

What makes debt consolidation fail?

Although these benefits are usually guaranteed in debt consolidation loan, there are people who fail at this program. There are a couple of reasons why this program can fail a consumer. If you are sure that this is what you want to get out of debt using this method, you need to avoid them.

Here are three of the most popular reasons why you can fail at debt consolidation loan:

If you do not have the right qualifications for it.

There are a couple of qualifications that you need to possess in order for you to enjoy the maximum benefits of debt consolidation loan.

  • Good credit score. To guarantee a low interest on your loan, you need to have a high credit score so that you can be viewed as a low risk borrowers. In most cases, people with bad credit scores are given a high interest because they have the highest chance of defaulting on their payments.

  • Collateral. If you do not have a good credit rating, another way to get a low interest is by having a collateral to put up for a secured loan. The lender is guaranteed that in case you default on your payments, they can fall back on your collateral as payment. They do not need to protect themselves by giving you a high interest because that makes you a low risk borrower.

  • Stable income. There is no debt reduction here so you need to be able to afford paying off the complete balance that you owe. Even if you used the loan to pay off the other debts that you owe, you should remember that you still owe the same amount of money.

If you have the wrong expectations.

As mentioned, there is no debt reduction. Some people make the mistake of thinking that their debts are paid off and solved. That is not true. You only used the loan to pay off your high interest debts. You still have the same debt amount – you just shifted it so you only owe one lender.

Also, some people get frustrated by the slow progress of debt payments. You should expect that because you have lowered your debt contributions every month.

If you do not correct the mistakes that got you in debt.

Another reason to fail at debt consolidation loan is when you fail to correct the mistakes that you made in the past. It can be bad spending habits like overspending. You need to identify what got you in debt in the first place so you can correct and avoid making the same mistake from now on.

It can also be a lack of emergency fund that got you into this mess. The great thing about this debt relief program is the lower monthly payments will free up some of your funds so you can put it in your savings. Growing your emergency fund will help you eliminate the need to borrow money.

Tips to make debt consolidation loan successful

There are many techniques to make debt consolidation loan successful. You need to follow as many of them as it applies to your unique financial situation. Here are a couple of tips that you can implement.

  • Do the math. Make sure you are really saving money if you go through this program. Use online calculators from Money.com or Bankrate.com to help you calculate if you are really better off with a debt consolidation loan.

  • Create a payment plan and follow it strictly. Some people make the mistake of using their loan for something else. Make sure you really pay off what you intended. Not only that, commit to paying this new loan diligently.

  • Remove the credit card temptation. This is one of the culprits in making debt consolidation loan fail. You have to stop acquiring debt by removing the temptation that credit card have. Now that your have paid them off with the loan, they would have gone back to the zero balance. That is very tempting to use. Do not give in and keep the cards somewhere you cannot access it easily.

  • Set financial goals. It helps if you provide yourself with goals that will motivate you to make your monthly payments. That will keep you from defaulting on your obligations and getting yourself into more trouble.

What You Need To Know About Debt Management

What You Need To Know About Debt ManagementIf you are deep in debt and you are wondering if debt management can help you get out of it, you need to understand the whole concept and process before you really decide. There is no shortage of debt relief programs but you need to choose depending on your financial capabilities. Otherwise, you could end up with more debt than when you started. Given your limited resources, the usual expenses that you have to meet and your credit obligations, making a mistake with debt relief is really not an option.

What is debt management?

Debt management, like all the other programs have specific qualifications that has to be met. You will understand all of them as you dig deeper into the whole process.

This solution actually begins with credit counseling. It involves a credit counselor who will look at your debt situation and advise you on the best course of action that will help you solve it. They will give you tips on how you can manage your debt and finances so that you can make better progress in paying down your debts.

If you have a steady income to support your payments and you only need to organize your multiple credit obligations you will be asked if you wish to avail of debt management. You will still work with the same counselor but this time, they will take a more active part in your debt payments.

The debt counselor will:

  • Help you identify the debts that you can enroll in the program (mostly credit cards, medical and personal unsecured loans).

  • Guide you in creating a budget plan to determine how much you can afford to pay your debts on a monthly basis.

  • Create a debt management plan (DMP) with you that will contain your proposed lower payment plan.

  • Present the (DMP) to your creditors and negotiate for its approval. During this negotiation, they will also try to ask them to lower your interest rate and have your other fees and penalties waived.

  • Manage your debt payments once the DMP is approved by letting you pay a single amount every month.

  • Distribute the funds you send to the various creditors in the plan.

  • Educate you on proper financial management to help you stay out of debt.

Benefits of using a debt counselor to manage your debts

You may be wondering why you need to go through debt management if you can handle things on your own. It’s true that it does not take a rocket scientist to manage one’s debt but here’s the reality: when you find yourself in debt, that signifies that you had been making mistakes in your finances. You want to know how you can correct those mistakes and oftentimes, a professional credit counselor can put the whole situation in a whole new light. That can probably help you identify the mistakes that will help you conquer your debt problems.

Here are a few benefits that a professional debt counselor can give you:

  • Expertise in the industry.

  • Years of experience.

  • Existing work relationship with creditors.

  • Professionalism during negotiations.

Of course, you get these benefits if you hire the right company to help you out. There are scammers out there waiting to prey on desperate people in debt and you have to steer clear of them. The best place to start looking for reliable and trustworthy credit counseling agencies/debt management companies is by looking at reputable organizations. For starters, look at the members of the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA). You can visit the websites of the members and see which companies seem promising. Also, you can check out if there are any filed complaints against them in the Better Business Bureau or BBB. Conduct a thorough due diligence to know if they are legitimate and sincere in helping you get out of your debt woes.

Comparing debt consolidation loans and debt management

Debt management, is one of the specific programs in debt consolidation. This is why it is usually pitted against debt consolidation loan – another method of consolidating debts. But to help you understand which of the two will benefit you best, here are some similarities and differences between them.

Similarities

  • Provide lower monthly payments.

  • Longer payment term.

  • Takes care of credit score.

  • Does not provide debt reduction.

  • Requires a steady and stable income.

Differences

  • Debt management involves a debt professional, debt consolidation loan does not.

  • A lower interest rate is guaranteed in debt consolidation loan while in debt management, it is a possibility but not always a certainty.

  • Debt consolidation loan requires a good credit score or a collateral to ensure an interest rate.

  • The tendency to incur debt is more possible with debt consolidation loan.

  • Proper financial education is part of the debt management service.

  • There is a service fee in debt management (maximum of $50 a month).

  • Debt management chooses the debts it will accept while in debt consolidation loan, you can use it for almost all kinds of debt.

Consider these carefully before you finalize your decision to use debt management as your debt solution.

Mobile Menu
MENU