Consolidating your debt is a great way to get out of debt without putting too much negative effect on your credit score. In fact, people think about this method long before they research on the different debt solutions that they can opt for.
Sometimes, people only need to organize their debts to make good progress in paying it off. Having more than one debt can get to be confusing to the point that you start missing out on payments. Good news is, there are two types of consolidation methods that you can choose from. Each of them cater to a specific financial situation.
Both of them will allow you to make single monthly payments. Not only that, the goal of both options is to make your contributions smaller. However, you need to understand that there will be no debt reduction for any for them. Despite the lower monthly dues, you will still end up paying for the complete amount that you owe. Because of that, a steady and stable income is an important requirement. If you know that your finances cannot afford this and you need a bigger reduction on your debt as a whole, choose another debt relief option.
To discuss their differences, let us begin with debt consolidation loans. This debt solution involves getting a significant loan amount that is enough to pay for your other debts. When you have paid off your other debts, you can concentrate on this one loan payment every month. Since a typical loan is spread out over a couple of years, you can expect that your monthly payments will be smaller compared to your previous arrangement. Another thing that can help is the type of loan that you will get. You need to target a low interest loan by having a good credit score or a collateral. Both of these will make you a low risk borrower – a qualification that will prompt your lender to give you a low interest rate.
But if you do not have a good credit score or a collateral, you can opt for the next debt consolidation type – debt management. This debt solution involves enrolling with a debt management company. They will assign a credit counselor to help with your debt troubles. They will use their expertise to analyze your finances and come up with a debt management plan that will serve as your guide. You need to provide them with accurate financial details to make sure that you will come up with a payment plan that you can afford. Once this plan is completed, the debt counselor will show it to your creditors to negotiate for a lower monthly contribution. This can be done by stretching your current balance over a longer payment term and negotiating for a lower interest rate. The former is usually approved but the latter request will depend on your creditor’s good graces. Once approved, you will send a single payment to the debt counselor who will take charge of distributing your payment to the different creditors on your debt management plan.
In choosing between the two, you have to identify the qualifications and your specific financial capability. If you will choose debt consolidation loans, you have to exert more control because you will take care of your own payments and you will monitor your own progress. In debt management, you get the assistance of a debt counselor who will remind you of your payment obligations. Of course, you need to pay the service fee but that is never over $50 a month.
The key to stay out of debt, however, is applying proper financial management practices. Most debt management companies have these to offer so your chances of learning the ropes to maintain a debt free life is more likely to happen with this option. But if you have the patience to research and learn on your own, you can save on the service fee every month and just opt for debt consolidation loans.