Debt Consolidation Loans vs. Credit Counseling

So you’ve finally taken a long, hard look at your financial situation and realized that you need to explore your debt relief options. The question to ask yourself now is, which one should you opt for?

Taking control of your finances and paying off debt is easier said than done, but are entirely possible to achieve. Among the various choices available to you are debt consolidation and credit counseling. Both debt relief programs offer consumers the opportunity to manage and eliminate debt. Many make the mistake of assuming that debt consolidation and credit counseling are one and the same; these two offer very different services which will be discussed below.

Debt Consolidation Explained

You can take your cues from the word ‘consolidation’ to determine what this service offers. Simply put, a debt consolidation company gives you a new loan and you use that to pay all of your existing unsecured debts. That leaves you with only one loan to pay off each month over a pre-arranged period of time, with one interest rate.

The primary benefit that loan consolidation gives is that it allows you to clear multiple debts with varying interest rates in one go, simplifying your financial obligations since you only need to pay one creditor (the loan consolidation company). In addition, the interest rate on a debt consolidation loan is usually much lower than the ones your current creditors are charging.

Moreover, what most people don’t know is that if you have the ability to pay your creditors in one lump sum, they may agree to accept a lower pay-off, also known as a “negotiated settlement”.

It is important to understand that debt consolidation is not for everyone. Depending on the amount you need to borrow to pay off your existing debts and the length of time that the lender will be willing to give you to repay the loan, it may or may not turn out to be beneficial for you. The bottom line is to carefully review the offer by the loan consolidation company to ensure that you are making an informed decision.

Understanding Credit Counseling

Similar to debt consolidation, credit counseling begins with a comprehensive examination of your existing debt. It also involves providing your debt counselor with all the financial details about the assets you and income so that they will have a clear view of your entire financial picture, after which the counselor will provide you with options that will match your resources, lifestyle and objectives. He or she will guide you through the necessary steps in order for you to arrive at a positive cash flow.

Credit counseling is performed by highly qualified debt counselors whose aim is to provide consumers with a straightforward and in-depth assistance concerning the proper management of debts. They help you develop repayment plans on all of your outstanding accounts, and may include advising you to make one monthly payment to them which they will then disburse to your creditors, or negotiating lower interest rates or the elimination of late fees with creditors on your behalf.

The disadvantage is if you to use a repayment plan, you may be required to close your credit accounts. This can cause your credit rating to drop considerably; however, if you’re behind on payments and your debts are reaching unmanageable levels, then it’s possible that this is hurting your credit standing anyway.

In the long run, while your credit score may take a beating temporarily, it may be worth it if you end up in a much stronger economic situation in the future.