6 Unsecured Debt Consolidation Options Explained
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When it comes to unsecured credit card debt consolidation, there seems to be a constant barrage of confusing and conflicting information and advertising. Wikipedia’s entry for the term “debt consolidation” proves to be vague, a bit confusing, and completely unhelpful for consumers looking for help in getting out of debt.
To further confuse matters, many companies advertising under the guise of “debt consolidation” or even “credit card consolidation” are actually offering totally different services or products! A quick search on google will probably leave the average consumer’s head spinning.
If you are looking for information or help with unsecured debt, how are you supposed to make sense of all this? Well that’s why we are here, so today we will explain some of the different options for consolidating your credit cards and unsecured debt.
1. Home Equity Loans. Home equity loans use the equity that you have in your home as collateral, generally allowing you to obtain a relatively low interest rate loan. Many people use these loans to consolidate credit cards and other unsecured debts. You must own a home, have equity, and have a relatively good credit score and credit history for this debt consolidation option to be available to you.
2. Refinancing. This option is very similar to the home equity loan option just discussed. With refinancing, you actually take out a new mortgage on your home which pays off the remaining balance of your old mortgage. Many people refinance to take advantage of better terms such as lower interest rates.
If you have equity in your home when you refinance, you may have the option of “cashing out” and taking cash, which will be rolled into your new mortgage balance. Many people use this cash to pay off high interest credit card debt.
As with the home equity loan, you must have solid credit and equity in a home to pursue this option for getting out of debt. Refinancing typically gets you a lower interest rate than a home equity loan; however, fees can be substantial and refinancing is generally harder to do.
3. Unsecured or Debt Consolidation Loans. For people who cannot, or do not wish to, obtain a home equity loan (or refinance), an unsecured debt consolidation loan may be an option. These loans, also known as personal or signature loans, generally have much higher interest rates than home equity loans because they are not secured by any collateral. Still, depending on your situation, they may have better rates than your credit cards. In order to take advantage of this debt solution, you generally need a pretty good credit score.
4. Debt Settlement. Debt settlement is probably the most controversial option for dealing with unsecured credit card debt. This is mostly due to the fact that, although many debt settlement companies advertise as a “debt consolidation” service, many people feel that it is not, in fact, a form of debt consolidation.
Without making any judgments, we will just say that using the services of a debt settlement company usually involves making monthly payments to the settlement company. These funds are usually held by the settlement company until you have saved enough to settle your debts and to pay the company’s fee. Then, the debt settlement company will attempt to reach an agreement with your creditors to pay a percentage of the debt that you now owe, and agree that you have no further obligation to the creditor for the settled account.
Debt settlement is probably not generally an attractive option for people with good or fair credit ratings, or for consumers whose debt is still held by the original creditors. For the consumer whose accounts are all in the hands of collection agencies, debt settlement MAY be helpful, but we would advise careful consideration of all factors (although we generally would never recommend a debt settlement, for reasons we will cover in depth in a future article).
5. Debt Management Plans or Credit Counseling. Another somewhat controversial credit card consolidation option is a debt management plan, also commonly referred to as “consumer credit counseling” or just “credit counseling.” Despite much misleading and inaccurate information, credit counseling can be a helpful option for debt consolidation for many people struggling with credit card debt.
For those who are behind on their credit card bills, over their credit limits, or are struggling with high interest rates or steep monthly payments, credit counseling could be their saving grace. In a debt management plan, a credit counselor works with your creditors to get you lower interest rates, get rid of late fees and over the limit fees, and helps you get your account back to current status. In many cases, a debt management plan can lower your monthly payments as well as help you pay off your debt much, much faster.
Still, credit counseling is not for everyone: those with already super low interest rates or those who can easily pay off their credit cards on their own very quickly should not seek the aid of a debt management plan. For those who do choose credit counseling, seeking a reputable agency is key. This topic will also be covered in much more depth in future articles.
6. Banktruptcy. The dreaded final option. Bankruptcy also gets a bad name by those who abuse it as a way to get out of paying their debt, by attorneys who try to convince nearly everyone to file, and by those who feel it is irresponsible and the ultimate shame. The truth is, bankruptcy is a good last resort for those who truly need it and have exhausted all other options.
Certainly, you should try all reasonable solutions before deciding to file bankruptcy. However, in certain cases, people truly have no other option or means to pay off their debt. While filing for bankruptcy does have negative consequences, it is not the end of the world. In fact, bankruptcy is designed to be somewhat of a clean slate for people who have no other recourse.
Unfortunately, many people believe that filing for bankruptcy means you will lose your home or car, or that you will never be able to obtain credit again. Fortunately, these beliefs are mostly false.
Hopefully you now have a better idea of how these 6 most common debt consolidation options work, as well as which options are most likely to be helpful to you. These topics will all be covered in much more depth in future articles, as each is much too complex to be discussed fully in this article. Remember, if you are beginning to struggle with any kind of debt, whether it is your mortgage, car loan, credit cards, medical bills, or anything else, it is important to get help quickly before you run out of options. Still, it is important to do your research, be cautious, and find reputable and trustworthy sources for information, particularly when it comes to the often controversial topics of unsecured credit card debt consolidation.
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