Debt Consolidation Loans vs Consumer Credit Counseling

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Many people struggle with debt. There often is a feeling of just wishing one could wave a magic wand like debt consolidation loans and make it disappear without ruining your credit. While it is never that easy to deal with the problem of excessive debt, there are options out there that may be able to help you ease the burden.

debt consolidation loansLearn the pros and cons of debt consolidation loans and consumer credit counseling before making a financial decision that involves using your home as security.

Two of the most common are debt consolidation loans and credit card counseling. Let’s delve into the details on both of these so you can determine which the best path is for you.

About Debt Consolidation Loans

Debt consolidation refers to combining several of your debts into one, usually with a lower overall interest rate. You can accomplish debt consolidation with transferring credit card balances, peer to peer lending, negotiating with your various creditors, and using a secured debt consolidation loan by means of a fixed second mortgage or a home equity line of credit (HELOC).

One of the most popular reasons homeowners take out a home equity loan is to consolidate credit card debt. You will need to speak with a second mortgage lender to determine if you are eligible and to uncover what the closing costs and interest rate would be on a 2nd mortgage to help you consolidate revolving and outstanding debt. In most cases, qualifying for a home equity line of credit and second mortgage is more difficult to be approved than a first mortgage.

The challenge is to determine with debt consolidation tool or program works best for you. Also, and this is very important, once you have consolidated your debt and freed up lines of credit, you want to ensure you are not back in the same situation in a year or two. See what the FDIC warns about home equity credit and using your home.

How to know which tool or program to use to consolidate debt? Consider:

  • Do you have no home equity and want a low interest rate? You may want to look for the best credit card balance transfer option you can qualify for.
  • Do you want to have a fixed rate and date of pay off? Then consider some type of debt consolidation loan program with an affordable installment plan.
  • If you have home equity you can tap, are you willing and able to make the extra payment on your home? If not, you could lose your house.
  • How high or low is your credit score? Your debt consolidation loan options can be quite limited if you have poor credit.

Remember, even if you are successful in consolidating debt, you need to be certain you have developed the financial discipline to not get into the same situation again.

About Credit Counseling

If you sign up for credit card counseling, you will be meeting either on the phone or in person with someone who specializes in dealing with debt and reorganizing your finances. He or she may also help you keep a budget, recommend financial classes you can take, and more.

One thing to remember about credit card counseling is that it often is not a free service. You will usually be paying a flat fee to a credit card counselor. It is imperative to locate a reputable credit counselor that you completely trust. Many people are desperate and this can lead to them making foolish decisions.

A good credit counseling company may be able to negotiate with big lenders to help you get a lower interest rate. This could get you a permanent, lower rate, or possibly a period where you are not charged any interest.

For people struggling with minimum monthly payments or for those who are dealing with collection calls, you may really need credit counseling. But to ensure that you do not get ripped off, you should do these things:

  • Check online if the company is accredited
  • Check if they are licensed
  • Verify that they had a good Better Business Bureau rating
  • Ask them up front what their fees are and services provided.
  • Ask to see a contract with all charges and services clearly listed.
  • Trust your instincts. If you feel pressured or are uncertain about what your costs will be, walk away.

Reputable credit counseling services will ask you many questions. They will want to understand your financial situation and your priorities. And they should work with you to craft a new strategy to regain total control of your finances.

While there is no doubt that Consumer credit counseling is a good option for some homeowners, it is not always the best choice. For example, credit counseling may save consumers money with an interest rate reduction and lower monthly payments, it can hinder homeowners the ability to refinance, consolidate debt or buy a home with a secured real estate loan because while, CCC doesn’t lower a consumer’s actual credit score, it may influence the way a mortgage underwriter for a bank or lender will consider a loan application.

Consumer credit counseling is mentioned on all accounts that are managed under CCC and many underwriters will consider consumer credit counseling like a bankruptcy because the borrower is paying less than originally agreed. Clearly consumer credit counseling in most cases is more a responsible choice than a bankruptcy, but if consumer are not eligible for a mortgage because of their credit cards being managed by a consumer credit counseling program then they should be informed of this possibility prior to enrolling in a consumer credit counseling service. See What the FTC says about consumer credit counseling.

Which Is Best for You?

The choice comes down to where you are in your debt and finances. If you can pay off your debt but want to lower your interest rate and give yourself fewer accounts to manage, you may want to consider debt consolidation.

As we noted earlier however, use caution if you plan to tap your home’s equity with a HELOC or home equity loan. You are now putting your home on the line with your debt. While you can save big on monthly interest, people have been known to lose their homes by using equity to pay off debt.

If you are struggling every month to pay your debts and are close to defaulting or may have already, you might want to consider credit card counseling.

Summary

People who have financial resources are often better off with some form of debt consolidation loans. Paying off high interest debt with home equity can work well, if you have the discipline to not run up debt again on those credit cards. You also have the advantage of writing off mortgage interest on your taxes, so this can save you every April as well.

But for people who have no savings and are already behind on their debts, you may have to opt for credit counseling. Just be sure that you have done your home-work on your potential credit counseling company; there are many stories on the Internet of people signing up for credit counseling and getting ripped off.

By doing a few minutes of research, you can find a good, reputable credit counseling company with reasonable fees.

About Bryan Dornan

With over 20 years in the mortgage industry, Bryan Dornan has started several companies, such as the Lead Planet, Mortgage Lenders Plus and the Refi Guide. Mr. Dornan has written hundreds of finance related articles in an effort to promote home-ownership to consumers across the United States.