Credit Card Debt Consolidation Loans & the Alternatives
Debt consolidation can be the answer to your debt problems, but which credit and debt consolidation option you choose could vary. The benefits are typically lowering the cost and payments of repaying debts, but just about every single solution comes with a cost. In a debt management plan, the monthly payment will be portioned out to different creditors by your loan consolidation vendor. In many cases, the interest rate after consolidation is very low and thus the repayment becomes much easier. In a solution like debt settlement, however, there are no monthly payments going to creditors and instead a consumer is saving for future settlements.
The easiest and the most common way to consolidate your credit card debt is to get a debt consolidation loan. This is primarily a second or third mortgage or a mortgage refinance loan which consolidates credit card debts by borrowing money against a high-value product like your house. The main feature of this type of process is your ability to consolidate secured debts at an interest rate which can be tax-deductible.
Credit card debt consolidation loans have become a lucrative opportunity for moneylenders in recent years. Now the lenders also offer options for people who have bad credit history and it is common to find ads for consolidation loans on the web, but be careful of debt consolidation rip-offs, with predatory rates and fees. It is not necessary to mortgage your home to obtain a debt consolidation loan for credit cards. The signature loans or personal loans will suffice for the purpose, but they will result in a very high rate of interest and they are very hard to get approved for.
The financial experts warn of certain disadvantages if you go for credit card debt consolidation. Although it reduces the payment amount, you may have to shell out a significant amount of money in interest over a period of time. This amount may even turn out to be double than the principal sometimes.
Going for debt consolidation services, and not using loan products, is also an alternative.
Credit Counseling & Debt Management Plans
The first credit and debt consolidation service to consider is a Consumer Credit Counseling Service, or CCCS. CCCS companies offer numerous services, such as financial counseling and budget planning, as well as Debt Management Plans (DMPs). In a DMP, the CCCS would arrange a new payment amount with each of your creditors, usually based on a reduced interest rate. You would then make a single monthly payment to the CCCS which would distribute the funds to your creditors, based on the new payment amounts.
There are several drawbacks to CCCS, though. First, depending on your creditors, it may not be able to reduce your monthly payments enough to improve your financial situation. Second, it may have a negative impact on your ability to obtain a loan, so you may not wish to enter into a DMP if you anticipate any large purchases, such as home or an auto, in the near future. Third, the average DMP takes around five years to pay off your debts, so you must be willing and able to commit to a long-term repayment plan.
You may also want to consider the services offered by debt settlement firms. Rather than making monthly payments to your creditors, these programs negotiate lump sum settlements with your creditors, frequently reducing your debts by 50% to 60% of your principal balances. These programs usually take only 3-4 years to complete, so this is a good option for many people to rid themselves of debt in a relatively speedy manner. In many cases they can also get you set up with a low monthly program payment, however you are making these special savings deposits in lieu of making minimum monthly payments.
You are NOT making payments to your creditors, which has negative consequences. There is one major drawback to debt settlement programs — they will significantly damage your credit while in the program and for at least a few years afterward. You will also be exposed to your creditor’s collection efforts, including letters calls and possible lawsuits. However, if you are currently unable to afford to pay your creditors, the hit to your credit and the negatives may be worth the benefit of ridding yourself of credit card debt.