Debt Consolidation vs Debt Settlement

Debt Consolidation is based on using your credit and/or equity in your home to allow you to borrow enough to pay off your debt.  When experiencing a financial hardship, a debt consolidation loan can sound like a good way out of your situation. 

However, with a debt consolidation loan you are replacing unsecured debts, with a secured debt, usually your home.  It is likely a debt consolidation loan will take 15-30 years to pay off with minimum payments, principal and interest. 

The instant you close on a debt consolidation loan, you have lost valuable home equity.  In the event of another unforeseen financial hardship, missing payments on a debt consolidation loan can risk the roof over your head.

The Debt Consolidation Option

When you are overwhelmed with debt, debt consolidation may seem like a very good way to get ahead. In many cases, debt consolidation is a viable way to rid yourself of debt and get your credit back on track. However, there are some situations where it is actually more costly than if you enrolled in a debt settlement program. This is due to the nature of debt consolidation programs which are currently available. Debt consolidation loans are simply larger loans used to pay off other smaller loans such as credit cards, payday loans and other unsecured loans. A debt consolidation loan is typically secured, meaning that it requires collateral such as the person's home or a cosigner as a guarantee. Sometimes the loan can be unsecured, but these are more difficult to acquire.

There are many debt consolidation programs that are available to consumers. Most are reliable and honest, but some are scams and you should avoid these at all costs. The four primary places in which you can find a debt consolidation loan program are as follows:

• Local Credit Union or Bank

• Other Banks or Credit Unions

• Mailers Advertising Debt Consolidation

• Internet for Debt Consolidation.

The thing to keep in mind when deciding to go with a debt consolidation program is that, if you are not careful, the interest that you pay on your consolidation loan may leave you paying more in the long run, sometimes three times over, than if you had enrolled in a debt settlement program with your creditors. This is particularly true if you stretch your payments over a longer time period, which will increase your interest rates.
The risks involved in using a debt consolidation program include the possibility of losing your home if you are unable to keep up with the payment schedule. Credit card companies and payday loan services cannot take your home if you do not pay. However, if you use your home as collateral in a debt consolidation program, you could conceivably lose it.

Debt consolidation programs can help you get out of debt or at least decrease the size of your debt, but they are not for everyone. You need to weigh all of the factors and review other options before taking the plunge.