Debt Consolidation – will this get you out of debt?
What is the best option to get you out of debt for good? You hear many terms and may not fully understand what they really mean. Debt Consolidation, for example, has become a catch all term for getting out of debt. The most common question American Financial Solutions credit counselors hear when answering the phone is “do you offer debt consolidation?”
The answer is that one of the options we offer, which is called a debt management plan, is the consolidation of all unsecured debt payments into one convenient monthly payment. Some of the benefits that creditors might offer on this plan are reduced interest rates and fees and sometimes even a lower monthly payment.
You may also have heard the term debt settlement and associated it with debt consolidation. It is not the same thing. Debt consolidation is actually the consolidation of all debt into one loan. The funding from the consolidation loan is used to pay of all existing debt and then one payment is made each month to the loan company. The problem is that most consumers who have considerable debt have trouble qualifying for a consolidation loan because of their high debt to income ratio and irregular payment history. Their credit score will reflect this. If they do get a loan, they will likely have to pay a very high interest rate.
Debt settlement is when a consumer offers to pay off a percentage of a debt to a creditor, who will then consider the debt settled. This is not the same as paid in full. The settlement will show up on your credit report. There are companies who offer debt settlement, however be very wary, their promises are often too good to be true and you may end up in litigation with your creditors, have judgments placed against you and have your wages garnished. For more information on the action recently taken by the Federal Trade Commission to protect consumers against the predatory practices of some debt settlement companies, please visit: http://business.ftc.gov/documents/bus72-debt-relief-services-telemarketing-sales-rule-guide-business.
I hope that this has helped you understand what debt consolidation and other like terms really mean. American Financial Solutions is a 501 (C) 3 Non-Profit Credit Counseling Agency. Our certified credit counselors are here to help. If you have a lot of outstanding debt and are having trouble making your payments, please give us a call. Your counselor will be able to expand on this explanation of what debt consolidation is all about and help you review your financial situation and your options for getting out of debt. You may call us at (888) 202-2994 or visit our website at www.myfinancialgoals.org.
