Debt Consolidation: Frequently Asked Questions

With more and more people struggling to make ends meet, debt consolidation has become a viable and popular way in which to better manage one's finances and to get out from underneath the burden of debt.

It is important for any consumers who are considering debt consolidation to know the facts about this potential debt solution. Below are answers to some of the most common questions about debt consolidation.

What options are available to those considering debt consolidation?

Two ways in which a consumer can consolidate their debts are debt consolidation loans and debt consolidation programs.

What types of debt consolidation loans are available?

There are three primary types of debt consolidation loans available:

• Mortgage refinancing with a cash-out option to cover the consolidated debts;
• Secured loans, such as a home equity loan; and
• Unsecured personal loans.

What benefits are associated with debt consolidation loans?

There are three primary benefits associated with debt consolidation loans:

• A debt consolidation loan replaces multiple bills with one simple monthly payment, simplifying the borrower's finances.
• A debt consolidation loan typically offers lower interest rates and extended repayment periods, which can result in a total monthly payment for the borrower.
• For a debt consolidation loan in the form of mortgage refinancing or a home equity loan, the interest paid on the loan by the borrower is tax deductible in most cases.

What is the difference between a home equity line of credit and a home equity loan?

While a home equity line of credit and a home equity loan are both determined based on the equity one owns in his or her home, a home equity line of credit works much like a credit card, allowing the borrower to draw funds from the line of credit as needed, while a home equity loan provides funds in one lump payment that is repaid over the course of a fixed repayment period.

What benefits are associated with home equity lines of credit and home equity loans?

There are two primary benefits associated with home equity lines of credit and home equity loans:

• The annual percentage rate, or APR, for both home equity lines of credit and home equity loans is typically much lower than interest rates associated with credit cards and other forms of credit.
• The interest paid on both home equity lines of credit and home equity loans is tax deductible in most cases.

Can one's credit score impact the ability to secure a debt consolidation loan?

Yes. Securing a debt consolidation loan works in the same manner as other types of loans. The better one's credit score is, the better loan options are available to that person. However, unlike paycheck advances, if one's credit score is too low, he or she might be unable to secure the loan.

What is a debt consolidation program?

A debt consolidation program is a service that works with its clients to coordinate their monthly finances. A client will make one payment each month to the debt consolidation service, which then distributes the funds to the client's various creditors. A debt consolidation service also develops debt repayment plans for its clients, providing a way for clients to be debt-free, ideally, within four to six years.

What benefits are associated with debt consolidation programs?

There are three primary benefits associated with debt consolidation programs:

• Because the debt consolidation program coordinates payments to a client's multiple creditors, the client needs to worry about making only one simple monthly payment, paid directly to the program's administrators.
• A debt consolidation program often is able to negotiate lower interest rates with a client's creditors, which in effect can decrease the amount of interest paid by the client and can lower the client's total monthly payment.
• Debt consolidation programs offer their clients debt counseling services, which educate clients about debt and help them to overcome their budgeting challenges.

Are there costs associated with debt consolidation programs?

Yes. Typically, a debt consolidation program will assess a one-time origination fee, which is followed by monthly representation fees.