What You Should Know About Debt Consolidation

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Tuesday, July 14th, 2009 Subscribe To Our Feed

There are basically two options when you are asking, how does debt consolidation work. You have the option to use a debt consolidation loan or a credit counseling service, if you are looking for a way to consolidate your debt. The big difference in the two alternatives is one of them is a loan and the other is not.

How does debt consolidation work with a loan? A debt consolidation loan usually take collateral for security and it will most likely be your home. While this is an alternative for getting out of debt, I do not consider it a good one. Essentially, you will using the equity in your home to pay off your debts. You will ultimately be paying your debts in the form of a house payment. Your payments may be lower, because you are paying them off over a longer period of time. Your interest rate will be lower and the interest you pay will be tax deductible. The downside—if you default on the loan, the lender can foreclose on your home. Statistics show that most people that enter into debt consolidation loans have credit card debt again within a year.

How does debt consolidation work with a credit counseling service? Your interest rates will be lowered as well as your fees being eliminated through the actions of the credit counseling serivice. The credit counseling company will disburse your single monthly payment to your lenders. Your debt will decrease, your credit card accounts will be closed and your collection calls will stop. All of your credit card accounts do not have to be enrolled. This is a credit score friendly version of debt relief. The program normally takes about 5 years to complete. Credit counseling is a good alternative as long as it used early enough.

When consolidating debt, these two options are used most often. Take some time to think about your financial situation and what will work best for you before making a credit card debt relief choice.

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