Debt Consolidation Loan Vs Debt Solution

Debt consolidation loans and debt solutions are two very contrasting ways of easing money troubles. Whilst filing for bankruptcy, debt settlement and a Debt Management Plan (DMP) will each reduce monthly repayments, a personal credit score will be adversely affected. Car loans and student loans cannot be written-off with bankruptcy. Taking out a loan to consolidate debt won't mean a bad credit rating, but the downside involves turning unsecured credit card debt into a secured loan on a property.

A Debt Consolidation Loan to Reduce Monthly Repayments

Consolidating debt with a loan is concerned with putting multiple credit agreements under one roof and making a single monthly repayment. This payment is reduced as the rate of APR on credit card debt is far higher. The amount owed can also be spread over a longer period of time; this helps keep payments to an absolute minimum. Simplified family finances also means that fewer missed and late payments are made.

FICO Scores

A regular, monthly repayment on a loan will help to maintain FICO scores. Filing for bankruptcy, debt settlement or a Debt Management Plan (DMP) will each have serious ramifications for personal credit scores. Whilst a debt solution helps with affordability, it still constitutes a breach of the terms of the credit agreement. Whilst the majority of debt solutions appear on a credit report for a period of 7 years, chapter 7 bankruptcy will show for 10 years.

Filing for Bankruptcy to Write-off Debt

Provided that an income is less than the state median and non-exempt assets aren't an issue, chapter 7 bankruptcy allows someone to become debt-free in just 4-6 months. Filing under chapter 13 allows a debtor to keep most non-exempt assets in return for a monthly repayment for a 3 to 5 year period. Contrast this with a debt consolidation loan where monthly repayments can last for in excess of a decade. Full court protection from collection agencies will be provided for the duration.

Debt Management Plan (DMP)

This debt solution allows someone to make a single, affordable monthly repayment to an intermediary (a private company or charity) who disseminates the proceeds to creditors on a pro rata basis. Although interest and further charges are often frozen by creditors, the lower payment means that it can take a number of years to become debt-free.

Debt Settlement

A private company will negotiate with credit card companies to write-off debt in return for a regular payment over a 3 to 5 year period. Whilst up to 50% of personal debt can be written-off, debt settlement plans are front-loaded. This means that management fees will initially increase the amount owed. If a homeowner already has a bad credit rating, this could be a better option than a secured loan.

Whether a debt consolidation loan is the right option will depend largely upon personal credit score and debt type. Car and student loans cannot be written-off by filing for bankruptcy; also, it may be more difficult to negotiate a deal with respect to alternative debt solutions. Someone with unmanageable credit card debt will probably be better off avoiding a further loan as turning unsecured into secured debt is rarely a smart move.

Relevant Articles:
Are Interest payments on debt consolidation loans really less?
How an Unsecured Loan for Debt Consolidation Will Help You
Pros and Cons of Debt Consolidation Loans

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.