Debt Consolidation vs. Debt Counseling

Debt Consolidation

How to start to pay off your debt amounts? Well, this whole process can seem voraciously confusing. Conventionally, opting for paying back the amount on the terms that were in the agreement can be one option, but in that way, you may have more of the interest cost in your name! Let us head for another option- How about attending credit counseling for exploring various options for an efficient payback?

Indeed, that would be great, but you will have to invest a lot of time to get the processes right. So, what can be the next compelling idea? Contextually, you can opt for simply consolidating your debt and start paying the debt consolidation loan. Knowing which option between debt counseling and debt consolidation is better, you first have to know the differences that account in its approach.

Both debt consolidation and debt counseling make an excellent choice to ensure speedy relief out of debt. However, most of the debt-ridden individuals have no hang of distinction between debt counseling and debt consolidation and use these two terms interchangeably. But without having good knowledge of these debt-relief options, you can never make an educated choice. Analyze your present financial health to determine which option will work best in your situation.

Digging deeper!

Debt consolidation is the most advertised option to break out of the debt trap. It is most favored by the debt-entrapped personnel. These people have a poor idea about other alternatives for debt relief and so always go with debt consolidation. For them, debt consolidation refers to a loan that provides coverage for current debts. However, there are other legitimate options like debt management or debt counseling to ensure recovery out of your debt issues.

What is a credit or debtcounseling?

Credit Counseling is a different type of debt consolidation that involves a third party. The objective is the same – managing your finances in a better way through negotiation for a reduced interest rate. However, instead of directly paying out to the creditors, credit counseling requires you to make payment to a third party, which takes the responsibility of distributing the funds to the creditors in question.

Similarities between debt consolidation and debt counseling

Each of these options will require you to have a consistent flow of income. The debt consolidation loan is not made available if you have no means of payout. The same holds true if you reach out for a credit counseling agency. Both the creditors and agency are concerned about how you will procure funds to support the negotiated scheme of payout.

Difference between debt consolidation and debt counseling

Most of the debt management or credit counseling agencies are affiliated with the credit providing houses. The objective behind setting up a non-profit agency is to minimize the loss of the creditors. These agencies provide free help and advice to those who are unable to manage payments. You may think that they are biased in their attitude. Still being in dire need of help, you may hire their free service for a reliable way out of debt.

It is not mandatory to hire a third party for debt consolidation. Taking out a loan does not necessarily indicate that you will use it to cover up your existing debts. As far as the creditors are concerned, they will just look into your affordability to payout and nothing else.

Another difference between credit counseling and debt consolidation can be discussed from the perspective of credit score. If you apply for debt consolidation, a good credit score will help in getting a competitive deal, which means the best interest coupled with much flexible term for repayment. Debt counseling, on the other hand, has nothing to do with your credit ranking. What concerns the debt management agency is whether you can afford the monthly installment settled according to a new scheme of payment. If you can manage that, it is fine with them.

When to opt for debt counseling?

If your financial reports are severely lacking the brimming conditions for tuning up with the rational numbers, going in for debt counseling can be an excellent idea. Moreover, debt counseling is the only way out for a smart comeback if you are adversely trapped in the debts and are unable to have it cleared for quite a long time. In this case, your credit score might be enormously low, and so you may not qualify for a debt consolidation loan. Well, for qualifying for debt counseling, you need to have your debt accessed, followed by drawing a budget. This process usually accounts for a debt counselor. Remember to plan your budget in accordance with the designs of a new repayment plan that suits both of you. Further, your creditors would have to stick to the designed, planned budget. Contextually, debt review tends to be a legal process that has something even more to add. In this step, the contract considers the new payment plan to be binding. You may be thinking, why?

Well, that is done to protect your financial status from those potential increases for monthly installments. With that, it commits you to stick to the new repayment plan and meeting further options for the repayment plan.

When to opt for debt consolidation?

If you are struggling to have minimum payments and are just striving to make little breathing room for yourself, debt consolidation can be an excellent option! But, interestingly, debt consolidation requires you to have a good credit score, that much with which you can qualify for a debt consolidation loan. And like the debt counseling method, the debt consolidation loan will have individual costs for you. Contextually, owing to the lower monthly installments that are typically achieved well by debt consolidation loan, that can be made possible by keeping your loan term extended. This dynamically increases the loan period over which you are charged interest. In the process, the debt becomes more costly. So extending your loan period should be done wisely with the maximum reasonable limit on your financial proceedings.

Which of the options make more sense: debt consolidation or debt counseling?

Knowing the various differences in debt consolidation and debt counseling, you can now choose which is better for your financial requisites. Putting it a more straightforward approach, if you are not struggling to meet your debt obligations and just opting for saving money on interest, debt consolidation can be a clear winner. For instance, suppose you have a couple of credit card bills, and luckily, you have pretty well disposable income that would favor you to opt for debt consolidation. It is because you have extra cash to pay for monthly payments. You can opt to consolidate the credit card debt to a personal loan with a lower interest rate. This would allow you to save your money on interest and allow you to pay your debt faster.

Contrastingly, debt counseling makes more sense if you have your bank accounts struggling for clearing debts. In this case, you may not have the optimum money for clearing the monthly minimum payments. In the process, debt counseling or credit counseling, as it is widely called, can help you understand your financial situation in a more comprehensive way. It is the best option for you to fic your debt problem, even with a low credit score.

In conclusion

Meanwhile, you may think that there may be some situations that require your upper hand to select anyone out of the two. Many people can fall somewhere in between. According to your financial reports and credit score, you can get the best option that suits you. Before opting for any of these, get into research and find out the various applicability that fits in your requisites.