You’re indeed in a bad financial situation if you have multiple debts with high-interest rates that you can barely pay anymore. If you’re experiencing such financial difficulty, it’s time to seek help to get back on good financial footing again.
There are two options you can take to pay off your debts and reorganize your finances: debt consolidation and debt counseling. Most people sometimes get confused between these two, and some think that these debt relief options are the same.
So, before you choose either of these two debt-relief options, it’s a must that you know the differences between debt consolidation vs counseling.
Debt Consolidation: What is It?
Debt consolidation is an act of getting a new loan to pay off multiple debts. After you have paid these debts, you’ll now only be paying the debt consolidation loan – that’s a single monthly payment. The thing to be kept in mind here is to choose a low-interest rate loan. You can find many affordable debt consolidation loans right now for that purpose.
Basically, consolidating multiple debts is advantageous because there’s the convenience of making a single payment to one lender instead of two or three payments to different lenders. And, of course, you may also avail of a lower rate of interest.
Steps to Consolidating Your Debts
There are steps that you need to follow to start your debt consolidation journey. Read and take note of them below.
1. Take Account of Your Debts
You can’t just guess the loan amount you have to get to consolidate your debts. So, for you to know the right debt consolidation amount, you have to tally up the total debt you currently owe.
You have to ask your loan providers or credit card issuers for your balances. You can also look for bills that come from borrowing money. Then, add them up to know your current total debt. Since credit can increase quickly due to the interest, you shouldn’t be shocked if your overall balance is higher than you have thought.
2. Identify Bad Debts
Not all debts are to be considered bad debts. The ones that should be under the “bad debt” category are those that have exorbitant interest rates. Home loans and car loans are not bad debts because they are secured loans, which means that they typically have advantageous rates of interest.
Credit cards and payday loans, on the other hand, are commonly high-interest debts. So, they can be put under the bad debt category, and you should consolidate them into one payment with an affordable interest rate.
3. Look for Debt Consolidation Loans
If your total debt is $25,000 with a combined payment of $700 every month, you should look for a debt consolidation loan that will pay the $25,000 off with a monthly payment of less than $700.
Now, where should you find a loan to pay off your current debt obligations? Well, you can get it from a credit union, traditional bank, peer lender, or online loan provider. You can also use the equity of your home to borrow money or take out a loan from your retirement account.
4. Pay Off Your Debts
After you get approval for your debt consolidation loan application, it’s now time to go to your creditors and pay off your debts. After you have paid them in full, you can now focus on paying back the loan that you have used for debt consolidation. Debt consolidation loans have repayment terms of three to five years.
Debt Counseling: What is It?
Debt counseling is typically given by a credit counseling organization, which can be a for-profit company or non-profit org. Such organizations or companies have certified credit counselors that can advise you on how to manage your debt and inform you about various debt relief options.
Credit counselors will help you understand your financial situation and assist you in creating a personalized plan to overcome your debt obligations. But aside from debt management advice, counselors can also give advice on financial budgeting and improving your credit.
If your debts are already too much to handle, counselors will often recommend a debt settlement option for you. In this case, the credit counseling organization will reach out to your creditors to settle your debt obligations at a lower amount than your original total debt.
Since most creditors or lenders don’t want their borrowers to default on their debts, they might accept debt settlement proposals. When your creditors agree to the proposal, you’ll be paying the agreed amount to the counseling agency, and then the latter will send your payment to your creditors.
So, there you go the difference between debt consolidation and debt counseling! Now, don’t get confused with these two debt relief options again. If you need to have a refresher about the differences between the two, just feel free to revisit this blog post.