Types of Debt Consolidation

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One of the ways that you can get out from under debt is by consolidating it so that it is more manageable. Debt consolidation works by taking all of your smaller loans and combining them in such a way that you only make one payment.

When you have several payments to make, and several different interest rates to worry about, it can be difficult to keep up with what you owe. It seems as though there is always a bill to pay. Debt consolidation can make it easier to pay down your debt, and it can provide you with an emotional boost as well, since there is only one bill to pay, rather than an endless procession of bills.

There are different types of debt consolidation to choose from, and they fall into two main categories: Loans and third-party counseling.

Debt Consolidation Loans

With a debt consolidation loan, you borrow a large amount of money and use it to pay off all of your smaller loans. You have only one loan, with a single interest rate. Debt consolidation loans often come in one of two types:

  • Unsecured: With this type of loan, you promise to pay, but aren’t required to provide collateral. For smaller amounts, you could use a balance transfer credit card to consolidate some of your high-rate balances. You might be able to get a bank to approve you for a personal loan to pay off your debts. P2P loans also provide debt consolidation opportunities.
  • Secured: If you have a major asset, you can use that as collateral to secure the loan. Many consumers choose to get home equity loans to pay off their debt. While you can get approved for a larger amount with a secured loan, you run the risk of losing the asset if you can’t make the payments. Some consumers lose their homes because of debt consolidation loans.

Also, when you get a debt consolidation loan, it’s important to try to avoid racking up the debt. Clearing off credit cards can raise the temptation of using them again, running up even more debt.

Third-Party Counseling

You don’t have to get a loan to consolidate your debt. There are credit counseling and debt settlement companies that can help you merge your payments into one without the loans. It’s important to be careful about what you are getting into, though, since some so-called credit counselors are scammers, and some charge outrageous fees.

Credit counselors often help you create a plan to pay down your debt. You make one payment to the company, and the company disburses the funds to your creditors. Sometimes, counselors negotiate lower interest rates so that your payments are more effective. You should double-check the company first, though, since you need to trust that the payments will be made.

Watch out for debt settlement. This is a similar approach, but instead of making payments on your behalf, you pay a company and your money is kept in an account. Instead of paying your bills, debt settlement is about convincing creditors to agree to accept a smaller amount of money. This approach can mean you pay less overall, but it can also destroy your credit.

Before consolidating your debt, educate yourself on the options, and make sure you understand what you are getting into.

About Miranda Marquit

Miranda is a freelance writer and professional blogger specializing in financial topics. Her work has appeared in numerous media, online and offline. Her blog is Planting Money Seeds.

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