Figuring out what to do with your debt can be a difficult decision with all of the available options in the market today. Some turn to debt consolidation while others hire credit counseling companies to help with the problem. While both of these options can help you eventually get out of debt, one may be more appropriate for your situation than the other.
Debt Consolidation
Debt consolidation is a process that involves borrowing money through a loan and then using that money to pay off your debts. This eliminates the accounts that you have had and puts all of the debt into a single package in a single account. To get a debt consolidation loan, you must have an adequate credit score and you will usually have to put up some kind of collateral. Once you take out the loan, you make a single monthly payment to the lender to pay off your debt.
Credit Counseling
Credit counseling is a service that is offered by many different companies. These companies are sometimes non-profit organizations while in other cases, they are for-profit entities. With a credit counseling service, you sign up for their assistance and they help you evaluate your options. In many cases, the credit counseling service will set you up with a debt management plan. This is a type of plan in which you make a payment to the credit counseling service every month and then they pay your creditors for you.
Loan vs Plan
The key difference between these two types of solutions is that one is a loan while the other is a plan. When you consolidate your debt, you are actually borrowing more money to pay off your debts. Then you have an actual loan to pay off from that point forward. For example, you could take out a home equity loan and use it to consolidate your debt. With a credit counseling service, you simply set up a payment plan that involves another party. You keep all of your accounts and simply pay them off over time.
Which One to Choose
If you can qualify for a debt consolidation loan such as a home equity loan, it may make more sense to go this route. By doing this, you can deduct the amount of money that you pay in interest on your taxes at the end of the year. If you do not have any collateral, or your credit is poor, using a credit counseling service might be an option to consider. By doing this, the credit counseling service can get you lower interest rates and you can pay off your debt quicker than trying to go it alone.
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