Archive for Debt Consolidation Loan

What’s the difference between credit counseling and debt consolidation?

This is a very common question, because a credit counseling Debt Management Program may appear to be very similar to debt consolidation. In both cases you have more debt than you can handle, so you enter into a program where you make a monthly payment to repay your debts.

In debt consolidation, you get a loan to repay all of your debts. You now have one monthly payment.

f you enter into a Debt Management Plan, your credit counselor works out payment arrangements with your creditors, and you make one monthly payment to your credit counselor, who then distributes the money to your creditors.

In both cases you make one monthly payment to deal with your debts. There are however two significant differences.

First, you must qualify for a debt consolidation loan based on your income and your credit. You may be required to provide outside security, such as a car or a house, to get the loan. The debt consolidator then lends you the money to repay your debts. With credit counseling there is no credit qualification; it is up to the creditors to accept or reject your plan. You do not need to provide any outside security.

The other significant difference is that you will be paying interest on your debt consolidation loan at the going rate, which may be very high if you have less than perfect credit. With credit counseling, you are paying a reduced interest rate. In many cases there is no interest if you make your payments as agreed.

If you have more debt than you can handle, investigate both debt consolidation loans and credit counseling, and then decide which option is best for you.



Should I Refinance my House, or go to Credit Counseling?

If you have a lot of high interest rate debts, like credit card debt or loans from finance companies, a debt consolidation loan may be an option worth considering.
If you own a house, you could use the equity in your house to get a debt consolidation loan.  The bank or mortgage company lends you money at a low interest rate, since the debt consolidation loan is secured by your house, so it’s low risk, and you use the money to repay your high interest credit cards.
Refinancing your house lowers your interest rate, but it also means that you have “used up” some of the equity in your house.  If you decide to sell your house before the debt consolidation loan is repaid, the amount you get from the sale of your house will be reduced by the amount outstanding on the mortgage.  If the real estate market declines, you get even less for your house.
In addition, if you have a 25 year mortgage, you will be repaying your debt consolidation loan over 25 years.  It will take 25 years before you are out of debt.
Most credit counseling Debt Management Programs last for three or four years, so with credit counseling, you can be out of debt quicker.
If you want to get out of debt quicker, and you can afford the payments, credit counseling is often a better option that refinancing your house through a debt consolidation loan.