Debt consolidation programs are just one option for you to help manage your debt. These programs are often best if you have multiple lines of credit that you’re struggling to manage or repay. All of the debts can be combined into one low monthly payment.
Types of Debt Consolidation
There are two types of debt consolidation: secured and unsecured. Secured debt consolidation requires collateral (valuable property pledged as security) which your creditors will take as payment if you can’t pay your debts. Unsecured debt consolidation does not require collateral.
Home Equity Loan
A home equity loan is a second mortgage borrowed against your home. You can use your home equity loan to pay debts and repay the loan as additional mortgage payments. The value in a home equity loan is that it does not have an impact on your first mortgage, so if you're locked in to a stellar rate on your first mortgage, you will maintain that mortgage while taking advantage of additional funds to consolidate high-interest debt, complete home improvements, or to set aside as a safety fund. Contact a reputable mortgage company to learn about home equity loans.
Debt Consolidation Refinance
This type of mortgage allows you to take cash out from the equity of your home on the first mortgage so you maintain one low monthly payment while leveraging the equity you've built in your home to put towards other necessities. This is a great option for those who would like to reduce their first mortgage payment while taking cash-out for consolidate high-interest debt, complete home improvements, or to set aside as a safety fund. It can also be a great option for those who have less than perfect credit and my not qualify for a home equity loan.
Debt Consolidation Programs (Unsecured)
Debt consolidation programs are not the same as debt consolidation refinances or home equity loans. These programs include financial counseling and repayment plans to help you manage debt. Typically you will need to have damaged credit and missed payments across liabilities to qualify.
Sometimes debt-relief companies will actually require that you miss payments in order to qualify. This can impact your credit very negatively and it can take years to recover. We typically exhaust all options for our borrower before making a recommendation to go this route.
How Do Debt Consolidation Programs Work?
Non-profit organizations usually run debt consolidation programs. It’s best to choose a program that has been evaluated and approved by the government. Note that debt consolidation programs are not always free.
Consolidation programs consist of two parts: counseling and debt management. In these programs, someone will meet with you and help you understand your debt, what measures can be taken, and the fees you may have to pay. You’ll make one monthly payment to the organization, distributing that payment among your creditors.
The fact that you’re in a consolidation program will appear on your credit history. It may affect lenders' decisions, but it shouldn’t drop your credit score.