If you have a lot of credit card debt, then the odds are you’ve been thinking about debt consolidation. But before you do anything, make sure you keep this in mind: there are both advantages and disadvantages with debt consolidation. While initially, you may think this type of debt management is a good choice for you, once you’ve considered the pros and cons, you may change your position.
Benefits of Debt Consolidation
Debt consolidation combines all of your debt payments into one low monthly payment. This allows you to stay more organized and makes your bills more manageable. Along with this, you won’t have to decide how much money to send each creditor and who gets paid first.
If you’re deep in debt, you’re probably spending a lot of money spreading it across several credit cards. You may even be spending hundreds or thousands of dollars in finance charges. Working with a debt consolidation company, they’ll negotiate with your creditors to lower your interest rates so you’ll focus on paying down your debt instead of simply making the minimum payments to take care of the interest.
Debt consolidators will also focus on lowering your payment costs every month. Instead of paying each creditor, you’ll make one payment to the debt consolidation company, who will then disperse the appropriate funds to each company. One reasonable low monthly payment sounds much more manageable than several high payments.
What are the Drawbacks of Debt Consolidation?
Even though your interest rates may be lower, it’s possible that it can take much longer to pay back your debt. In turn, the amount that you’ll end up paying in interest can turn out to be greater. In order to avoid this we recommend using a debt consolidation company or, if you plan on handling your debt yourself, you must remain highly organized and focus on paying off your debt as fast as possible.
A Closer Look at Debt Consolidation Companies
We’ve briefly touched on debt consolidation companies and how they can help you more efficiently pay off your debt. Now, we’ll learn how they work and what you can expect in terms of price.
Once you have contacted a debt consolidation company, you’ll start off with a free consultation. During this consultation, a debt specialist will go over your finances in order to determine how much debt you’re in and what type of payments you can afford. If you agree to the terms, a debt specialist will tell you to stop making payments to your creditors. In fact, they recommend not communicating with your creditors at all until they have negotiated lower monthly payments. You’ll pay the debt consolidation company directly. They’ll take a percentage of the payment and use it towards service fees. The amount you pay for the debt service will depend on how much you owe, who your creditors are, and how much you can afford to pay each month.
So what are the drawbacks to using a service? Because your debt specialist will recommend that you stop communication and payments to all your creditors, this can result in your accounts being sent to collections. In severe cases, lack of payment and communication can also bring about a lawsuit. Often, debt consolidators recommend this step because it gives them more control during the negotiation process. However, doing this can also ruin your credit history and majorly impact your credit score.
Debt Management Company Recommendations and Pricing
If you’ve decided to give a debt consolidation company a shot, here is a brief list of some of the top companies in the industry. Each of these companies offers a similar service, but they also provide additional services, aside from the basic debt consolidation program, such as financial counseling, webinars, educational resources, and the best customer support in the industry.
Accredited Debt Relief: They offer competitive prices, charging twenty-five percent for services. They also have one of the highest client success rates in the industry and make it a point to educate their clients regarding money management.
National Debt Relief is another leading company in the industry. They also charge twenty-five percent for their service fees and have an A+ rating with the Better Business Bureau.
CuraDebt charges a lower service fee at twenty percent, and claims they can save the average client thirty to fifty percent on debt costs, thanks to their highly skilled staff of debt specialists.
Freedom Debt Relief charges fifteen to twenty-five percent for their monthly service fees and has one of the highest client success rates in the industry.
Is a Debt Consolidation Loan a Better Option?
Debt consolidation loans are a type of financing you can take advantage of if you have multiple debts. This will allow you to combine all of your debts into just one loan. This type of loan is most commonly used to pay off credit card debt. If you’re tired of paying high interest rates on a number of credit cards, a debt consolidation loan will allow you to pay off all your credit cards and pay back just one loan. This means you’ll only have to worry about the debt consolidation loan’s interest rates.
Keep in mind that this type of loan won’t change how much money you owe, you’re simply paying off multiple debts quickly, in exchange for a new one. However, taking out this loan allows you to avoid multiple payments, each of which has a high interest rate. Hopefully, the debt consolidation loan you secure offers a better interest rate and a more manageable monthly payment.
Before you apply for a loan, you must determine how much money you can afford to pay towards the loan every month.
Another thing to keep in mind is that a debt consolidation loan is geared towards paying off unsecured debt such as medical bills, rent, utilities, and credit cards. This type of loan isn’t designed to pay off debt that has collateral, such as an auto loan.