Is Debt Consolidation Really A New Loan?
Debt consolidation can either be a new loan if you are rolling several debts into a new financial obligation, or it can be as simple as consolidating several credit cards onto one lower-interest card.
When deciding to enter into debt consolidation, you need to make sure that the costs of this new financial obligation do not outweigh the costs of paying your debts separately. Take into consideration all fees and charges when making your decision, and don’t forget that late payments can also incur late fees.
What Is the Difference Between Debt Consolidation and Debt Settlement?
While debt consolidation means you’ll be working to repay your debts, debt settlement means your debt is being wiped out. While this may seem like the easier options, there are advantages and disadvantages to be considered.
Debt consolidation can help you climb out of debt, eventually improving your credit rating and your overall financial standing. Debt settlement, on the other hand, will often adversely affect your credit and lenders may be reluctant to work with you since you have not paid off past debt. Also remember that you’ll have to pay taxes on any amount that is written off.
What Are the Benefits to Debt Consolidation?
When you consolidate your debts, you are streamlining your financial picture so that it will be easier for you to repay your outstanding balances. Rather than making several payments on different accounts, you’ll only have to make one monthly payment, thereby making it easier for you to chip away at and eventually eliminate your debt.
In addition, when you negotiate with your creditors, you can try to get a reduction on your interest rates and even on the total amount owed. Remember, your creditors would prefer to receive payment then to have to pursue debt owed – or worse, to write off the debt. You may find that they are very willing to work with you as you consolidate your debt.
Who Ends Up Paying For the Reduced Debt?
In a sense, both you and your creditors are paying for your decision to reduce your debt. Your creditors may not receive full payment, or they will receive it after it has been requested. You will also pay for the reduced debt in terms of any fees associated with your debt consolidation loan, as well as with your time and effort to reduce the outstanding amount.
You can use this as a learning experience – with proper household budgeting, you will likely not find yourself in as much debt and needing to take action on outstanding balances.
Are There Monthly Fees?
Many debt consolidators charge a fee for their services, and this fee varies with each firm. These fees typically run between 10 and 15 percent of the total monthly payment.
It’s important for you to ensure that your debt consolidation firm is not overcharging you for their services. To check a firm’s standing, contact The Association of Settlement Companies, the professional organization for settlement firms. You can also contact the Better Business Bureau.