By Justine Anderson
Debt consolidation has become a financial choice for the majority of the households in US. You can consolidate your debts in 2 ways. One is a consolidation loan and the other is by signing up for a debt consolidation program that is offered by a company that helps you in consolidating debts. Basically, consolidating debts means you are condensing your debts (medical bills, store card bills, utility bills, credit card payments, etc) into a single debt account. In both debt consolidation options, you enjoy lower payments.
What happens if you take out a debt consolidation loan?
If you want to consolidate your debts using a debt consolidation loan, you take out a loan the amount of which is equal to the individual outstanding balances of each debt account. If you take out a loan by using a security, it is known as a secured debt consolidation loan. Most debtors use their homes as collateral. Since you are using security, creditors don’t charge high-interest rates. This is because if you are unable to make payments, the creditor will sell off your house to recover his payments.
Alternatively, you can also take out a consolidation loan without using security or collateral (unsecured debt consolidation loans). This loan is given to you depending solely on your repayment capacity. In fact, the majority of the consumers taking out these loans have fairly good credit. Since you are not using any collateral, the rate of interest the loan attracts will be quite high.
How will a debt consolidation program give you debt relief?
In a debt consolidation program, you hire the services of a company that will negotiate with your creditors to convince them to reduce interest rates. This will lower monthly payments too. You get a repayment plan that will help you to keep track of your payments.
Debt consolidation loan versus program
In a consolidation program, you are reorganizing your existing debts without taking on additional financial responsibility. In the case of a consolidation loan, you are adding to your existing debts.
Debtors usually prefer enrolling in a consolidation program. This is because if you have taken out a secured debt consolidation loan and for reasons beyond your control if you fall behind on payments, your creditor will take away your home to recover their dues. So, you risk your home if you take out a consolidation loan that is secured. But in the case of a program, you just need to follow your repayment plan religiously and continue making payments.
However, all debtors may not agree with the same. Whether taking out a debt consolidation loan is better as compared to a debt consolidation program also depends on the financial condition of a debtor seeking debt relief.
Justine Anderson is a freelance personal finance writer.
Image: mortgagechoice.com.au
