When you enter a debt relief program, your credit counselor will likely attempt to move all of your debts through the program. Even personal debts can be added to the debt relief program, but it is not always in your best interest to take this step. While debt relief can save your credit and reduce your total debt, it can also be very costly in the long run.
Function
The goal of a debt relief program is to move you out of debt quickly. This is accomplished by paying off your existing loans with new loans, typically issued by the debt relief company itself. The company negotiates for lower payoff quotes with your existing lenders. As a result, the total debt remaining is only a fraction of the prior existing debt. In order for debt relief to be effective, as many debts as possible should be paid off. This includes personal debts, even if they are not secured with an asset.
Benefits
The main benefit of debt relief is to reduce the total amount you owe lenders. Contrary to what some advertisers say, debt relief will not save your credit immediately. You will still be in debt, just to a new lender, and the process of closing your existing loans can actually harm your credit. You will still have interest on your new debt, and this can make the new loan costly. However, the total sum is reduced, and you may avoid default on multiple loans through a debt relief program. By moving all of your debts into the new loan, including personal loans, you have the best chance of reducing your debt load.
Downsides
Debt relief often reduces debt at the expense of many other financial goals. By settling your loans in large numbers and closing them down, you will see a drop in your credit score. Further, you may actually be able to save money by closing loans yourself than you will with a debt relief program. By negotiating loans yourself, you can only settle those loans that are beyond your ability to pay currently. Those loans you can pay, such as small personal loans, would not be added to your new, large settlement loan. You can also prioritize loans based on interest rate. When working independently, you can pay down the most costly loans first and save the cheap loans for the end. Often, you will actually spend more money going through a program -- which will always cost a fee -- than going it alone.
Warning
The Federal Trade Commission now prohibits debt relief programs from collecting upfront fees. It does this to protect consumers from falling for debt relief scams; there are plenty of scams on the market. Beware of any debt relief counselor who promises results that appear to be "too good to be true." Always factor out the total costs of the program versus savings you will obtain to determine if the program is actually helpful or just another form of predatory lending.
Alternatives
If you are suffering from the cost of too much debt but do not want to use a debt relief program, contact the Consumer Protection Agency to ask for advice. The organization can teach you about limitations on the debts you owe, and you may find the lender no longer has a right to collect. You may also learn you qualify for bankruptcy protection. Though this step is scary, it is designed to help people who can no longer afford the burden of their debts due to life's hardships. Bankruptcy rotection can be a much-needed assistance to those who qualify.
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