The idea behind debt consolidation is to combine all your unsecured debt payments into a single monthly payment to one creditor. Usually, this will be the creditor whose interest is the lowest, which will allow you significant savings, also given that you’ll skip interest payments that would have otherwise increased your overall debt.
There are many debt consolidation plans, and each works differently according to the debt relief service provider and other terms.
When should I go for Debt Consolidation?
If you have given some thought to debt consolidation and whether it’s a viable option for your case, you’re probably struggling with making repayments on your personal loans, bills, credit cards and other unsecured debt. You’re probably just going from one paycheck to the next, with little to no savings or investment income to back you up, simply creating one hole to fill up another one.
It’s understandable in this situation to be embarrassed, ashamed even, and hide your real struggle from those closest to you. However, hiding behind a façade will do nothing for your financial situation; you need to take decisive action rather than avoid the problem. Taking action sooner than later will save you greater hustle in the long term, making it easier to find a solution that solves the problem before it escalates any further.
Debt consolidation is for many a practical step towards more manageable and stress-free monthly payments since you have just one payment to track and pay, rather than many smaller payments. There are people who are disciplined enough to work through their debt, but for many more, you need to seek professional assistance.
Types of Debt Consolidation Plans
If you opt for professional assistance, you will have two options, a Debt Management Plan (DMP) and a Debt Settlement Plan (DSP). They are both created to enable you make smaller, more affordable payments, and each comes with its benefits and downsides. Regardless of the plan you use, it will take work, discipline and sacrifice to work through your debt and come out debt-free.
To qualify for a debt consolidation plan, a person needs to have accrued $2,500 in unsecured debts from two or more sources and a steady source of income. Debt consolidation plans do not apply for secured loans of any kind like home equity loans. With these plans, you don’t have to take out a loan, which occurs in some debt consolidation arrangements. You take out a loan, repay all the other debts and remain with just the one to pay.
DMP Debt Consolidation
With DMPs, your unsecured debt owed to various creditors is managed by rolling them up into a single affordable monthly payment you agree upon with your counselor’s guidance. Your debt relief service provider negotiates extensively with your creditors to get benefits like lower interests, elimination of late penalties or over-the-limit penalties.
Your payments are made to your DMP provider and they distribute it to your creditors. This plan is friendlier on your credit report than a DSP.
DSP Debt Consolidation
DSP are recommended for those who cannot afford the payments for DMPs. In this arrangement, the DSP provider negotiates for you to pay a smaller amount on your outstanding debt. It allows you to settle a percentage of the debt, and is the less drastic option compared to filing for bankruptcy.
Monthly payments are also made to your DSP provider through an escrow account. The money is held until the DSP provider reaches an agreement with the creditors. The funds deposited will then be paid to the creditors as agreed.
To know which plan is better for you, contact a qualified, certified and reputable debt relief services provider before making any commitment to either plan.