This is tricky stuff.

The Debt Consolidation Loan

A debt consolidation loan is a loan that you take out. You use that loan to pay off your debts. Now you only have one loan to pay off, that great big debt consolidation loan. If you’re smart, lucky or  both, you’ve set it up so that your one big debt consolidation loan charges less interest than your multiple smaller loans. The bottom line: you pay off your creditors (so your credit stays in tact and your conscience can rest easy) and you have one, somewhat lower bill, each month to pay off your debt consolidation loan.

If you can swing it, a debt consolidation loan is the way to go. It’s fair to your creditors (they don’t get gypped), it preserves your credit and reputation, and it may make life simpler. Most people end up paying significantly less money, too. It may help your credit report (you pay off your loans, always good for the credit score), and it reduces the chances of making late payments by reducing the number of bills you owe (late payments are always bad for the credit score).

If you own your own home, particularly a home that has appreciated in value or one in which you have a lot of equity, you can probably manage to get a debt consolidation loan.

But what if you don’t own your own home or any property? You may still qualify for a debt consolidation loan. But if other factors trip you up, like a sketchy credit history, bad employment record, (or no current job) or other factors, you may find that you can’t get another loan.  After all, companies that lend money like to be as sure as possible that they’ll be paid back. If you’ve already demonstrated you’ve gotten yourself in trouble with credit, most companies want to hold collateral or something of value before they’ll lend you even more money. Being out of work or earning very little money can also make it tough, even impossible, to get a loan.

Debt consolidation negotiation (sometimes called debt relief) is another option. It’s not as desirable, for a lot of reasons, but it can still work for you. Your first choice, if you can manage, should almost always be the debt consolidation loan.

Debt Consolidation Negotiation

With debt consolidation negotiation, you’ll be working with a company that will actually negotiate with your creditors. They simply act as your agent, explain your situation, and try to negotiate an agreement that allows you to pay off your debt. They may be able to settle your debt for less than you owe, but that is not always the case. In some situations, all they can do is buy some time (perhaps a company will give you a few months “off” from paying providing you agree to pay the full balance) or negotiate for a lower minimum monthly payment or other arrangement.

Sometimes negotiators can get creditors to settle a debt for less than the actual amount you owe.

You pay the debt consolidation company one check a month (they tell you how much) and they then handle it so that your creditors are paid.

There are a couple of things to watch out for with debt consolidation negotiation or so-called debt relief companies. First of all, have your certified credit counselor (and possibly an attorney) check out what they ask you to sign. This is a prime area for fraud, so be very sure you know what you’re doing. Second, keep in touch with your creditors. If the debt negotiation company does not want you to talk to your creditors, run. While they will be handling the negotiations for your payment, make sure you talk to your creditors and let them know what’s going on. No matter what the debt negotiation company tells you, those debts are still yours and those creditors are still your creditors. 

Debt relief or debt consolidation negotiation works in a different way than a straight debt consolidation loan. With the loan, you pay off your creditors and just work at paying the one loan. Your many smaller bills are paid, your creditors are happy, and your credit stays intact.

With debt consolidation negotiation, you still have all the old bills. Your credit will get beat up, because your creditors will know you’re working with a debt relief plan. Some of your creditors may get stiffed a bit; debt negotiation companies try to negotiate settlements or get more favorable terms. While creditors may indeed extend them to you (under the theory that it’s better to get something than nothing), they are going to report them to the credit bureau. You’re also unlikely to be able to get credit from them again. And your conscience may hound you because you really did not keep your word. You borrowed money, promised to pay it back, and then asked if you could pay back less.

The debt consolidation negotiation (or debt relief) plan often takes longer than a straight debt consolidation long. You will also likely end up paying more. With debt relief, you may end up maintaining some of your old, high interest rates. While debt relief companies can sometimes get settlements from your creditors, sometimes they cannot. Sometimes the negotiations just buy you more time or a lower minimum. You may end up paying that $5,000 at 22% in smaller bites per month but you’ll still end up paying. And the longer it takes you to pay, the more interest you end up paying!

Which One Is Right for You?

Now with all of that being said, why would anyone want debt consolidation negotiation (i.e. debt relief) instead of a debt consolidation loan? If you have a choice, by all means, go for the loan. It makes life simpler, keeps your credit standing, and you’ll most likely end up paying less.

The only reason to go with the debt negotiation is if you cannot get a debt consolidation loan. And, to be realistic about things, not everybody qualifies for the loan.

But if you can’t get the loan, debt negotiation is better than bankruptcy. In other words, when you’ve got to choose between declaring bankruptcy (almost always a bad choice) and going with debt negotiation, pick debt negotiation.

If you find that you’re going to have to go with the negotiated debt relief option, here are some important points to consider:

·      Do your homework; it’s vitally important that you consult with a certified credit counselor and an attorney before signing up with this type of program. There are many reputable companies out there; you just need to be sure you’re working with one of them. Also, it's very easy to sign something from a reputable company and still not understand exactly what you're agreeing to. You need an attorney to help you be sure you know what you're getting yourself into.

·      Contact your creditors and keep the lines of communication open. Your company will represent you in negotiations, but you need to check in periodically to be sure that things are being paid.

·      Be very serious about making this work. Your credit is in tatters, so any misstep now can cost you very big. Be disciplined in getting this paid off.

·      Avoid any new debt. Even if you can’t buy new shoes, have to eat oatmeal for dinner, and can’t afford to go to the movies … do not use any more credit.

·      Find a respected financial advisor (bank officer, certified credit counselor, etc.) and talk to them periodically. They can help you take steps to restore your damaged credit, get some money in the bank, and generally get back your financial health. The best thing is to make contact with them as you start to fix your situation and check in periodically with progress reports. Get their advice on credit, savings, investment, and money management. That way, when you’re ready, you’ll already know what to do.

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