Debt Negotiation Vs. Debt Consolidation
- Credit counseling agencies will work with your creditors to negotiate lower monthly payments and interest rates and to settle your debt. They will also work with you to set up a monthly budget and teach you to manage your money more effectively. Some of these agencies are not reputable and may stop operating while you are in the middle of the service. For this reason, you should carefully choose the agency and check with your Better Business Bureau. Working with this type of agency may negatively affect your credit, but if you are already behind on payments it will not make a big difference.
- Some people choose to negotiate with their creditors instead of using an agency to do it for them. To do this you will need to call each creditor yourself and ask them to reduce interest rates or lower your monthly payment. If you have a legitimate reason such as a job loss many creditors are willing to work with you, though it may take a few phone calls and concessions on your part, such as freezing your account. If you are behind on your payments you can often negotiate a debt settlement where you pay a smaller amount to settle the loan and they forgive the rest. Any amount forgiven is taxable at the end of the year, and you should only work on negotiating the debt once you have the cash to settle it.
- Debt consolidation is when you take out a larger loan to pay off a group of smaller loans. This often locks in a lower interest rate than what you would have on your credit cards. The monthly payments may be lowered because the length of the loan is often stretched over a longer period of time. This can make your monthly debt payments more manageable, but you may have a difficult time qualifying if you have already missed payments. Do not use a second mortgage or home equity loan for debt consolidation because your home will be at risk if you miss any payments.
- As you consider the three options take a careful look at your debt load and income. Set up a budget and a debt payment plan to see if you can work out a solution on your own. Then make the decision based on your current situation. If you are already behind on payments, debt negotiation may be the better option. If you want to change your situation before it gets out of control debt consolidation can help you pay off your debt more quickly and save money on interest.