Have you gotten to a point where your credit card debt is just too overwhelming to tackle on your own? Unsecured debt consolidation loans are a common way for consumers to get out of debt. Banks and other financial institutions, such as debt consolidation firms, may offer these types of loans. But how exactly do these loans work? Are they the best option for consumers to pay off debt?
How does an unsecured debt consolidation loan work?
An unsecured debt consolidation loan is a means of combining multiple unsecured debts in a way that makes them simpler to manage. Unsecured debts are personal debts for which there is no physical collateral, such as credit card debts or medical debts. A consumer looking to pay off debt will take out a loan from a bank or other financial institution, and they only pay one monthly payment on the loan instead of multiple payments to each of their creditors. The financial institution disburses the payments to the creditors from there.
These types of loans are easier to manage than paying all of your creditors separately because it is one payment, but because it is a loan, you do need to ensure you pay it on time. Missing payments, like with any other loan, can hurt your credit score. The last thing you would want is for your efforts to get out of debt doing you more harm than good.
Are these loans the best option to get out of debt?
First, let’s be clear: There is no one-size-fits-all debt management method. There will never be one way to get out of debt that works for every single person in debt, because everyone has their own unique financial situations to take into account. Some people may not even need outside help to get out of debt. If they feel that they are disciplined enough to tackle a large amount of debt on their own, unsecured debt consolidation loans probably won’t appeal to them. For others, they may be very deep in debt and have a bad credit score, meaning they might not even get approved for a debt consolidation loan.
For those who do need outside help, but aren’t sure that debt consolidation loans are the right option, there are other choices. One option is debt settlement, but this is not recommended by most financial professionals. Another option is debt consolidation through a nonprofit credit counseling agency, which offers the same concept of one monthly payment, but without taking out a loan. This is called a debt management program.
What is debt management?
When you work with a credit counseling agency like ACCC, you start with a free credit counseling session. In this session, you collect all of your outstanding credit card statements, and monthly bills, and they work with you to create a manageable budget. Next, they assess your credit card debts, and other unsecured debts, and create a proposal to send to your creditors. Creditors have been known to lower your monthly interest rates, accept a lower monthly payment, or re-age your accounts so they are current, instead of in arrears. The goal of a debt management plan is to get you out of debt in the shortest period of time, without going through bankruptcy or debt settlement, both of which are detrimental to your credit score. Each month, the credit counseling agency disburses your payment to each of the creditors.
If you struggle to pay off your debt, ACCC can help. Sign up for a free credit counseling session with us today!