a thing of the past?
What is Debt Counseling?
Debt counseling, in essence, is about education. When you call a debt or credit counseling service, you're calling a counselor to help you with your debt and your budget. These counseling sessions usually start out free, and then move on to other paid options—like consolidation, custom budget strategy creation, debtor negotiating, and more. Debt counseling is a good solution for those that could consistently make monthly payments if they were just a bit lower. It's also a worthwhile solution for those that want to learn more about how they can avoid incurring more debt on top of what they already have.
Some debt counseling agencies will direct you to debt consolidation. Debt consolidation takes all of your various debts and replaces them with one, lump sum debt. Debt consolidators “pay off” your debt, and then offer you one payment at a fixed interest rate. Instead of paying several creditors throughout the month, each with their own interest rate, you pay one bill to the consolidation service. Be wary of debt counseling services that offer consolidation services. Consolidating your debt is basically the same thing as getting a loan. It's replacing your old debt with new debt, your creditors with a single creditor. It's important that the creditor you are borrowing from is trustworthy.
Debt counseling 101: Secure vs. Unsecure Debt
Typically, consolidating your debt involves some form of secure collateral, like a house. Homeowners can refinance their mortgage and use equity from their home to pay off credit card debt. If you take this route, know that when you collateralize your home, you agree to the forced sale, or foreclosure, of your home to pay back the loan should you fail to make payments. Generally, you can secure a lower interest rate if you consolidate your debt using the above method. However, home equity and a good credit score are both required to qualify for a loan.
It is possible to consolidate your debt without collateral, though again, a good credit score is required. Credit card debt is unsecured debt, so going this route means you would be replacing your unsecured debt with more unsecured debt. Furthermore, unsecure consolidation usually carries a higher interest rate.
If you don't want to consolidate your debt, a debt counseling agency can sometimes negotiate with your creditors for lower monthly payments. While many creditors are open to negotiation, it requires a commitment on your part. They'll need to see that you're serious about repaying your debt. It can be easier to secure lower payments if you have a good track record of timely payments. While your monthly payment amounts can be lowered through negotiation, to lower the actual debt amount, you'd need to talk to a company like Freedom Financial, that deals in negotiating lower debt amounts.
Is debt counseling right for you?
Debt counseling isn't right for everyone. If you are not in serious financial distress, it could be worth looking in to. If you can manage your payments now, but would like some more wiggle room, or need to have them lowered due to unforeseen circumstances, debt counseling might be right for you. If you know you can pay off your loan, consolidating your debt could result in a lower interest rate. Of course the other perk is that it also simplifies your payments, so instead of paying several bills, you're only paying one. Finally, if you're interested in learning more about how to manage and maintain a budget, a debt counselor can help you with that.
On the other hand, if you have a large amount of debt, and you're struggling to make payments, consolidating your debt could be the wrong move, especially if your home is on the line. There are other options you can pursue that don't involve losing your house. Also, if the only option you have is unsecured consolidation, your interest rate may be too high. You could end up paying more than you originally owed in the long run. If you're suffering under the burden of crushing debt, you might want to pursue a more aggressive option than debt counseling.
Every debt situation is unique. For some, debt counseling and debt consolidation are a excellent solutions. For others, it can result in more debt over time, and even foreclosure. How can you find out if debt counseling is right for you? Call Freedom Financial and speak to a debt specialist. We're here to help put you on the right path to financial freedom. If debt counseling isn't right for you, we can suggest alternatives. All it takes to get started is a conversation. Call today.
