People attempting to avoid financial crisis try different ways to resolve mounting credit debt. Unpaid credit bills can lead to calls from creditors and debt collectors and the threat of losing a home or other property. Out of control credit debt might be the result of job loss, poor financial decisions or family emergencies, such as illness or death. Some people, after trying other debt relief remedies, can resolve their debt crisis with credit consolidation loans.
Credit Consolidation
Credit consolidation involves taking out a new loan to pay off existing loans, or credit debt. The loans allow you to combine your credit and make one payment. Some financial institutions offer account holders low interest, unsecured loans for credit consolidation. Many institutions offer secured credit consolidation loans that require you to use your home as collateral for a home equity line of credit or a second mortgage. The risk to lenders is lower since they get the collateral if you fail to pay off the loan.
Benefits
Credit consolidation can result in lower fees, interest rates and monthly payments. Combining your credit debt can make it easier to manage your finances since your new loan requires one payment and has a schedule and a set of terms. According to the Federal Trade Commission, credit consolidation loans can offer certain tax advantages over other types of credit. Credit consolidation can help you avoid bankruptcy by discharging problem debt.
Problems
According to the Federal Trade Commission, you could have problems including the debts covered on a failed consolidation loan in a future bankruptcy. Consolidation loans that use your home as collateral can result in the loss of your home if you make late payments or default on the loan. Some lenders require you to pay fees known as points. Points are equal to 1 percent of your loan amount. Some companies allow you borrow up to 125 percent of the value of your home. Some loans charge higher interest rates and take 15 to 30 years to pay off. You could end up owing more on the loan than your home is worth. Consumers who fail to change the habits that caused the debt crisis could end up in greater debt than before the credit consolidation loan.
Credit Counseling
Whether you choose credit consolidation or another debt relief method, credit counseling or debt relief services can help you understand and choose the best remedy for situation. Alternatives to credit consolidation include debt management, which require you to make monthly deposits with a credit counseling agency for payments on your unsecured debt, including student loans, credit cards and medical bills. Creditors that participate in debt management plans, which can take up to 48 months to complete, may agree to waive fees or lower your interest rates.
Tips and Warnings
The Federal Trade Commission website provides a national listing or FTC-approved credit counseling organizations. Federal consolidation loans for student loans, which are different than credit consolidation loans, are authorized by the Higher Education Act and administered by the Direct Loan Program and the Federal Family Education Loan Programs. Choose a nonprofit credit counseling organization that is accredited by the National Foundation for Credit Counseling and that employs certified credit professionals.
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