Credit Counseling / Debt Management
Credit counseling provides consumers with guidance on consumer credit, money management, debt management, and budgeting. The goal of most credit counseling is to help a debtor eliminate their debt and avoid bankruptcy if they find themselves struggling with debt repayment.
Many credit counseling services will negotiate with creditors on the borrower’s behalf to reduce credit card monthly payment amounts and loan interest rates as well as waive late fees. According to the Consumer Financial Protection Bureau (CFPB), credit counseling agencies most often operate on a nonprofit basis, although there are credit counselors that are for-profit as well.
Credit counseling companies can also help you create a debt management plan (DMP), which allows you to make a single payment toward your debt each month. Under a DMP, the consumer deposits money each month into an account within the credit counseling organization and the organization uses the funds to pay unsecured debt, such as credit card bills, student loans, and medical bills on a monthly basis until the debts are paid in full.
These debt payments follow a more affordable schedule that the counselor and the consumer develop together. Often, creditors will need to agree to the scheduled repayment plan. Creditors generally lower interest rates and waive fees which makes it possible for you to pay off your debts in far less time. A successful DMP requires regular, timely payments. It may take 48 months or more to complete a DMP.
Debt Settlement
Debt Settlement companies negotiate with creditors to reduce overall debts in exchange for a lump sum payment. A successful settlement occurs when the creditor agrees to forgive a percentage of the total account balance. Normally, only unsecured debts (not secured by real assets like homes or autos) can be settled. Unsecured debts include medical bills and credit card debt; but not public student loans, auto financing or mortgages. For the debtor, the settlement makes obvious sense: they avoid the stigma and intrusive court-mandated controls of bankruptcy while still lowering their debt balances, sometimes by more than 50%, saving them thousands of dollars. For the creditor, they regain trust that the borrower intends to pay back what he can and not file bankruptcy (in which case, the creditor risks losing all moneys owed).
Personal Debt Consolidation Loan
A Debt Consolidation loan is a method that takes multiple debt accounts and combines them into one loan with one payment. In other words, you can take several credit cards, loans, or bills and roll them into one loan, with only one, generally lower, monthly payment. Often, you can get a much lower fixed interest rate than you had on the previous debt accounts. This is achieved through a debt consolidation loan from a bank or financial institution, where you receive a lump sum to pay off your other debts, then make one simple monthly payment on only one loan.
Home Equity Debt Consolidation Loan
A Home Equity loan is a loan in which the borrower uses the equity of his or her home as collateral. The loan amount is determined by the value of the property, and the value of the property is determined by an appraiser from the lending institution.
Home equity loans can be used to pay off all of the borrower’s debts at a much lower interest rate. Please note that a home equity loan creates a lien against the borrower’s house and reduces the home’s equity.
Most home equity loans require good to excellent credit history, reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types: closed end (traditionally just called a “home-equity loan”) and open end (traditionally called a “home-equity line of credit”). Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage.