The best ways to consolidate debt
The recommended way to resolve outstanding debt, would be through a traditional credit counseling program. Consolidating debt is when a consumer rolls all monthly debt obligations into one monthly payment. Most consumers consolidate debt to either lower interest, or the monthly payments. One of the most popular methods to resolve debt is through a credit counseling program.
When consumers look into debt relief, many solutions exist.
1. Credit counseling
2. Debt settlement
3. Retirement loans
3. Home equity loan
4. Self payment
Credit counseling program
When doing credit counseling, a consumer rolls all unsecured debts into one easy payment. Although the payment can be reduced up to 50%, the average reduction in payment amount ranges from 10 to 25%. Another key benefit to credit counseling is the reduction of interest rates. Furthermore, if a client is delinquent a month or two, after a few consecutive payments the creditors would be willing to re-aged the accounts to a current status. Unlike other debt relief programs, credit counseling is the only program that is not calculated into the consumers credit score. The credit counseling program is one of the leading program to resolve debt at this present time. The accounts enrolled, will remain active and the creditors enrolled will be satisfied.
Debt settlement program
This option is recommended for consumers who want the absolute lowest monthly minimum payment possible. With the reduction of the debt amount to 20% to 50%, this helps consumers get the lowest payment possible which gives that person more room to breathe. Debt Settlement, will impact ones credit score given they are current. If delinquent, it can possibly increase the credit score. Debt Settlement is recommended, given they cannot proceed with the program above, credit counseling. If looking for the best ways to consolidate debt, this can be a secondary option.
Retirement loans
401(k) loans should never be looked into. When a consumer borrows from a 401(k) the amount that was accumulated stop earning compound interest until they are returned to that account. Another thing to consider, is if the loan cannot be paid back its considered premature cash withdrawal and is subject to federal tax, state tax and usually an early withdrawal penalty. Requesting a 401(k) withdrawal to pay off unsecured debt is not a recommended option and is not a method to consolidate debt.
Consolidating through a home equity loan, home equity loan
Unfortunately, some people consolidate their debt into a home loan. Through this method, the consumer would use the home to pay off the creditors and in turn have one monthly payment. Let us never forget, credit card and collection debt is unsecured debt whereas a home loan is secured. Meaning, if a consumer were to stop paying on their home they would foreclose and take the house. With credit cards being unsecured, the worst thing a creditor can do is write it off as bad debt. Consolidating all unsecured debts into a secured debt such as a home is never recommended.
Self payment
We like to refer to this as the "pay forever plan". More than 85% of consumers are making minimum payments, on high compound interest. This results in the client paying the minimum payment almost indefinitely. This is exactly where the creditors want their customers to be. By doing this, if the consumer doesn't pay at least two or three times the minimum payment there is no hope for that client. Again, unless a client can double or triple these payments, do not go with this option. This is not a good way to consolidate debt.
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