A December 10, 2009, Bankrate.com article contends that 70 percent of people who deal with debt by consolidation loans wind up in much higher debt within two years than they were when they sought rescue. This means that if you take drastic action to deal with debt, you need to take drastic steps to change the thinking that produced the debt in the first place. For most people, tackling individual debts through budgeting and negotiation is the best plan.
Debt Consolidation Companies
Debt consolidation companies promise to bundle your myriad debts into one convenient payment and save you money as well as hassle. But many financial advisers, including those with MSN Money and Bankrate.com, warn against high interest rates, monthly fees and long-term loans that wind up costing you more than the original debts would have. A better solution is credit counselors who also bundle unsecured debt and negotiate better terms with creditors, but for free or very low cost. Reputable companies can be found, like the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling (see Resources).
Other Types of Debt Consolidation
Consumers can consolidate debts with several types of loans. A home equity line of credit is one such vehicle, but it can be risky. These loans can leave the homeowner with more debt than his home is worth, or, if he defaults, he can lose his home. Borrowing from your 401K is another option, but it also is risky and has huge tax consequences. The best consolidation vehicle is a personal installment loan from a credit union or bank, which credit agencies view more gently than credit card debt.
Debt Relief Companies
Debt relief companies offer to take one low payment and get your creditors off your back. They generally settle the debts with the creditors for a portion of what you owe. Until new rules kicked in in September 2010 they collected hefty fees--normally 15 percent--before ever providing any service. Federal Trade Commission rules since September prohibit that. Still, debt settlement is a big black mark on your credit report, and if you do decide to settle your debts, you can do it just as well yourself.
Do-It-Yourself Debt Management
The main thing debt consolidation and debt relief companies offer is stress relief from numerous debts and harassing creditor calls. But what these agencies do for a fee, you can do for free. You can negotiate a payment plan with creditors. You can budget and set up automatic payments from your bank. These steps have a far less negative impact on your credit rating. As a second alternative, you can get a personal installment loan, where you borrow the money to pay debts, then make payments only to the bank or credit union. Make debt settlement the last resort.
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