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Debt Consolidation | Loans, Companies & Service Options

What is Debt Consolidation?

Debt Consolidation is a term used to generally describe debt relief services. Those services are traditionally a new line of credit to transfer or payoff debt in the form of a bank line of credit, balance transfer credit card, or home equity line of credit. Recently, the industry has evolved to include services like credit counseling and debt settlement.

Chances are, if you're reading this article, that you have some serious debt accumulating. It can be extremely daunting when the bills keep piling up, and you may not know where to turn to for help. You may have heard a bit about debt consolidation but aren't too sure on how it can help you climb your way out of the hole you're in.

Read below to learn which debt strategy may be most appropriate for your specific situation.

Debt Consolidation Loans

One of the most common types of debt consolidation is a consolidation loan, which allows you to merge all your debts under one single payment. There are a couple of different types of debt consolidation loans you can use.

Secured Debt Consolidation Loans

Typically a secured debt consolidation loan will allow you to lump all of your debt payments under a single bill at a lower rate than the individual rates you may have been getting. However, in order to secure a lower rate with a secured debt consolidation loan, you must have some type of asset to use as collateral, such as your home. More information on that can be found below.

How much of a loan you can get depends on the type of collateral you're using and how much it's worth. These types of loans can also be repaid back over a long period of time, anywhere from 5 to 30 years, and they can often improve your credit score if managed properly. If not, you risk defaulting on the loan and losing the asset used as collateral.

Unsecured Debt Consolidation Loans

Much like a secured debt consolidation loan, an unsecured debt consolidation loan allows you to combine your debt payments under one lump sum with one interest rate. However, unlike a secured debt consolidation loan, you don't need an asset or collateral to receive such a loan.

Because you're not offering up any collateral for such a loan, it's a much riskier loan for debt consolidators, and your interest rate could be somewhat high. These loans are determined based on your credit history and score, and the upside to an unsecured debt consolidation loan is that you're not in jeopardy of losing your asset should you default.

Credit Card Debt Consolidation

There are also programs that allow you to consolidate all of your credit card debt into one single payment (and interest rate). If you have good credit, you could also be able to negotiate a lower interest rate on your credit cards, making it easier to pay off.

Another option is to qualify for a new credit card at a low introductory interest rate (possibly as low as 0%) and transfer your credit card balance to your new card. While you're in your interest free rate, you can make double payments in order to pay off your debt faster. But keep in mind that the interest is likely to be fairly high after the introductory period. You should consider this way of consolidating debt only if you know you can pay off the debt while the introductory rate is in effect.

Using a Home Equity Loan as Debt Consolidation

A home equity loan allows you to borrow money, using your home as collateral. This home equity loan is essentially a second mortgage that allows you to turn the equity on your home (the money your home is worth minus the amount you owe on it) into cash for you to use at your discretion, such as debt consolidation. These loans are set up to be repaid quicker than your mortgage in equal payments with a fixed interest rate.

Home equity loans are secured loans that come with the same risks and rewards mentioned above.

Enrolling in a Debt Management Program

Another option when it comes to debt consolidation is to enroll in a debt management program. A credit counseling agency will help you set up a debt management plan so that you can pay off your debt in a timely fashion. This agency will also usually negotiate with your debtors in order to reduce interest  rates and fees.

Once the repayments have been negotiated you will set up an account with the credit counseling agency and pay one lump sum a month into the account. The credit counseling agency will then disburse the payments out to each individual creditor. This benefits you because you only have to make one payment, but it also gives creditors more assurance that your payments will be made on time each month.

Credit counseling agencies can also help you create a budget that's easy for you to follow and help alleviate some of the stress your debt has been causing you. As long as you stick to the plan a debt management program can help you save money, get rid of debt sooner and have a positive impact on your credit score.

Debt consolidation doesn't have to be scary, and there are many options that can help you get out of debt faster. Research all of your options and then choose the one that works best for you and your financial situation.

Debt Settlement

Debt settlement is a new industry that has seen success and controversy over the past decade. For consumers in hardship and who are no longer able to make payments on their debt, professional companies will negotiate a settlement on your behalf for less than you owe. They will usually charge a percentage of your debt, and must not charge you before settling a debt. Since you are not paying your creditors in this time, your credit will likely be adversely affected and you may open yourself to risk of litigation. You can negotiate debts yourself, but it is time consuming and potentially risky. Creditors deal with thousands or millions of customers and know all the strategies. If you plan to go down this more aggressive get out of debt strategy, it is highly recommended to employ an agent who has dealt with thousands of negotiations to work on your behalf.