When you’ve decided it’s time to pay off your consumer debt once and for all, planning is key. It’s a smart idea to start by writing down all of your debt obligations, including each loan or credit card balance, who it’s payable to, the minimum payment and the current interest rate.
From there you can move on to making a plan to get your debt paid off as soon as possible. Among the options to help speed up debt repayment are debt consolidation and debt refinance.
What’s the difference between the two? Is one better than the other? Here’s what you need to know before you agree to consolidate or refinance your credit card or other consumer debt.
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What is debt refinancing?
Debt refinancing involves moving your debt to a lower interest rate vehicle, either by transferring credit card balances to a credit card with a lower interest rate, transferring debt to a home equity loan product or transferring debt to a lending company.
With debt refinancing, the goal is to lower the overall interest rate that you are paying. For instance, if you have credit card balances with interest rates in the 15% to 20% range, you could refinance those balances to a lending company such as Sofi, Prosper or Lending Club and get a lower rate, typically between 6% and 12% depending on your credit history.
Whichever refinancing option you choose in order to lower the interest rates you are paying on consumer debt, it’s important to look at the fine print so that you clearly understand all fees, closing costs and interest rate rules associated with the new loan option you are considering. It’s wise not to agree to any type of refinance loan until you understand exactly what you are getting.
What is debt consolidation?
Debt consolidation typically involves a debt consolidation company that offers to lower your payments and your interest rates on your debt so that you can get your debt paid off more quickly.
It’s important before agreeing to any type of debt consolidation that you understand what you’re walking into. Not all debt consolidation plans are as beneficial as they might first seem.
Debt consolidation
A basic debt consolidation company will help you to move some or all of your debt to one place with a lower interest rate and a set number of months for the term of the loan. Again, when looking at debt consolidation companies it’s important to understand the terms and conditions of the loan before signing on the dotted line.
Debt settlement
Debt settlement differs from debt consolidation in that debt settlement companies work with your creditors to lower balances and interest rates in order to help you get debt paid off quickly. However, many debt settlement companies often charge fees for their services, and debt settlement does affect your credit report negatively.
If you choose to use a debt settlement company (and I only recommend this if you have changed your spending behavior and have exhausted all other means of paying off debt) be sure to do your research and understand the fees involved as well as the impact on your credit report.
Debt management
Debt management companies use certified credit counselors that help you to create a realistic budget and spending plan, collect a specific amount of money from you each month to be paid toward your debt and work to help you pay off creditors in a way that is comfortable for your financial situation yet gets your debt paid off in a specific amount of time. As with debt settlement plans, debt management plans also have the potential to negatively affect your credit record.
Some debt management companies charge a fee for services, but most reputable companies do not. Again, it’s important to read the fine print before signing any type of an agreement with a debt management company. I would also recommend checking online reviews before making a commitment to a debt management or debt settlement company.
Avoiding scams
Unfortunately, there are many debt management and debt settlement companies out there that are not as reputable as they would like potential clients to believe. In fact, experts on the subject would tell you that they’re downright scam artists. Here is how you can avoid getting scammed while seeking out debt payoff help.
- Avoid debt relief companies that ask you to pay a large up-front fee.
- Avoid companies that offer to remove justified negative reports from your credit card record.
- Check online for company reviews and with your state’s commerce department to see if the company you are considering working with is licensed. Many states require debt management companies to be licensed.
- Avoid companies that offer to eliminate large amounts of debt on your behalf.
There are reputable debt relief companies out there. The National Foundation for Credit Counseling is a long-running non-profit organization that accepts membership from reputable debt management centers. When you contact the NFCC, they can help you find a certified credit counseling agency in your area.
Before you refinance or consolidate your debt…
If you’re considering refinancing or consolidating your debt, it’s vital before making any restructuring decisions that you are committed to not borrowing any more money. If you refinance or consolidate your debt and start using your newly freed up credit card available balances, you could end up in even more debt than you started with.
Before you make any decisions to refinance or consolidate your debt, it’s important to get a good budget and spend-tracking plan into place, and to make sure that both you and your spouse are committed to spending within your budget so that your debt can get paid off as quickly as possible. Explore options like the debt snowball or debt avalanche for getting balances paid down quickly.
With proper planning and unwavering commitment, you can be debt free!
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