What Are The Disadvantages of Debt Consolidation?

Debt Consolidation: Disadvantages

Many times, people are so relieved to find a solution to their debt problems that they focus on the positive aspects while ignoring or downplaying some of the potentially negative sides. To develop a comprehensive debt strategy, you will have to take a hard look at the advantages, but especially the disadvantages to see what makes sense for you. This is true when it comes to debt consolidation because this solution will have implications for your financial future and how you can manage your debt going forward. While debt consolidation may be a great debt relief option for some, there are disadvantages that need to be considered, including the following:

Debt is Not Paid Off

If you are having financial difficulties and can’t keep up with multiple payments, at least you can focus your efforts towards a single monthly payment with debt consolidation. Disadvantages include the fact that the full amount of your outstanding debt is still owed. The good news is, your interest rates will be lower, allowing you to put more towards the premium each month and to actually make headway with your payments.

Longer Repayment Period

When you consolidate your debt, remember that the full amount does not really change, it just gets stretched into smaller monthly payments. This longer repayment period is something to consider when developing a debt consolidation strategy, especially if you really planned on being debt free by a specific date.

Serious Penalties

There are hefty penalties when you miss payments for a debt consolidation loan. These can include very high late fees and penalties in addition to potentially losing any collateral (your home, car, or other asset) that you used to secure the loan. The penalty costs will add up, potentially causing you to pay more for your debt than you originally owed before entering into a debt consolidation program or loan agreement.

Gaining Control of Your Debt

While there are some disadvantages to debt consolidation, there are also many positive outcomes. Of course, a debt relief expert can help clarify exactly which solution will benefit you the most. You don’t have to live with debt forever. You don’t have to struggle to make ends meet every month. Take advantage of the tools available to help you gain control of your debt and start on the path to becoming debt free.

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How Does a Debt Relief Program Affect Your Credit?

Debt relief programs can be a great way to regain control of your finances if you are suffering from overwhelming debt. However, it is crucial to realize that there could be a potential impact on your credit score depending on the program you choose. When deciding on the right debt relief solution, it is essential to know how a debt relief program affects your credit.

Credit Counseling

Credit counseling can be a fantastic way for you to develop a plan to get your debt under control. This approach involves meeting with a certified and experienced counselor who will analyze your current financial situation. This includes your income, expenses, investments, and debts.

Your counselor will help you to create a plan tailored to your specific needs. This approach does not have a negative impact on your credit score. For example, meeting with the credit counselor may help you to realize you can adjust your budget and gradually pay down your debt over time. With the right debt relief program, you will be able to set realistic financial goals.

Debt Consolidation

Debt consolidation is a debt relief option that merges all of your outstanding unsecured debt, into a single monthly payment. This can include credit card debt, some student loans, medical bills, and car payments. This option may offer you a lower interest rate for all of your combined debt so you put less towards interest and more on the premium with each payment.

Debt consolidation can be a great tool to help improve your credit if used correctly. If you can consistently make all of your payments each month then over time, this will help to boost your credit score. However, the reverse is also true. If ever you are unable to make payments or experience a financial setback that causes you to miss payments, not only will you have high penalties, but it will also have a negative impact on your credit score.

Debt Settlement

Debt settlement is a type of debt relief program that requires you to pay only a partial amount of your outstanding balance. This is an agreement between you and your lenders who are willing to negotiate. Though it leaves you paying less, debt settlement can have a negative impact on your credit score depending on the steps you take during the negotiations.

Typically, while you are negotiating, you stop making payments directly to your lender to save up enough money to pay a lump sum all at once. It is during this period that you may see a negative impact on your credit score. The debt settlement process can take months or years depending on your balance. If this is the case, it could have a more significant effect.

Bankruptcy

Bankruptcy is often seen as the ultimate debt relief option because it may offer complete relief from your overwhelming debt. However, bankruptcy also has the most severe consequences and can affect your credit score poorly because you are seen as a risk to the credit bureaus. Bankruptcy will stay on your credit report for at least 7 to 10 years and will significantly decrease your options for obtaining loans or lines of credit. You may also not be able to open a credit card for up to 2 to 3 years.

Choosing the Right Debt Relief Program

Liberty Debt Relief has experienced and educated individuals ready to work with you and advise you further about your options. Contact us today and become more informed before making any one of these major financial decisions.

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What is an Example of Bad Debt?

Bad Debt in America

Millions of people today struggle with all different types of debt. According to a Federal Reserve Report on the Economic Well-Being of U.S. Households, published in May 2017, 79% of Americans have at least one credit card. This means that millions of Americans are faced with credit card debt and have to manage their finances accordingly. Debt can be very stressful and overwhelming, especially as your balance continues to grow.

As you think about your financial well being, it can be very confusing when you constantly hear terms such as good debt and bad debt. You may even be wondering what these terms mean and how debt can be bad or good.

What is Bad Debt?

This type of debt is incurred from purchasing assets that depreciate or go down in value as soon as you buy it, such as clothing and consumable goods. If you are unable to make money or generate income for a purchase, it may not be worth going into debt over. Purchasing a new car is another form of this kind of debt because, as soon as you purchase a new car and take it home, it has already gone down in value.

Another typical example is credit card debt. Credit cards are designed to make sure that you pay the maximum possible with high-interest rates. They can also have an extremely negative impact on your finances if not appropriately managed. If you keep a balance on a credit card, it will end up costing you significantly more than what any item or service you buy is worth. This is especially true if you only make the minimum payment every month. Credit cards are seen as one of the worst examples, but there are others.

What is Good Debt?

Good debt is seen as “good” because, ultimately, it is used to help you generate income or increase your net worth. Short term investing and real estate investment loans are just two examples. The most well-known example today, however, is student loan debt. As the costs associated with higher education continue to rise, it is becoming increasingly more difficult to pay for college.

Taking out student loans to fund your education can be good because the loan will eventually pay for itself once you finish school and can find a job. Individuals who have a college education consistently out-earn those who do not have a college degree, so this can be seen as an investment in your future.

Another example of good debt is taking out a small business loan to help grow your business. Creating your business is a great way to generate income and potentially increase your network as well, similar to small business loans are loans for short-term investments.

Managing Your Debt

To stay on top of your debt, it is important to actively manage your debt and work towards eventually becoming debt free. Having a mix of good and bad debt is normal, but it is important to limit or pay down the latter quickly to stay on track with your financial goals.

If you need help with your bad debt and regaining control of your finances, it may be worth it to meet with a certified debt specialist to come up with a comprehensive debt relief plan. Meet with ours at Liberty Debt Relief, and explore multiple debt relief options and ways to get back on track to financial freedom.

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Debt Consolidation vs. Debt Settlement Agreement

Debt Consolidation vs. a Debt Settlement Agreement: Which is Best for You?

With all of the information out there today, it can be difficult to decide which debt relief option is best for you. Whether you have multiple maxed out credit cards, huge car payments, or large amounts of unexpected medical debt, there are options available to help you gain control of your finances. Knowing all of your options and what will be best for your situation is key to coming up with a realistic and actionable plan to becoming debt free.

There are many different aspects you need to know when considering debt consolidation or a debt settlement agreement. Both are tools that can be used to experience debt relief and ultimately regain control of your finances.

What is a Debt Settlement Agreement?

This solution is an agreement that is made between you and your lender that allows you to pay back a partial amount of your full outstanding debt and settle your account. Depending on the amount of debt that you have, the process can take a few month or even years. Additionally, not all lenders are as willing to negotiate an agreement, so this option is not always available.

Debt settlement agreements can also have a potentially negative impact on your credit score. If you are not making consistent payments during negotiations with your lender, or if you are not working with a debt relief organization to save money and offer your lender a large payment all at once, then your credit score will definitely be impacted. These are all factors that need to be considered when deciding if this is the right option for you.

What is Debt Consolidation?

Debt consolidation is the merging of all of your outstanding unsecured debt, into one single payment. Unsecured debt is money owed with nothing being held as collateral. With this approach, you are also able to get a lower interest rate, which means you will pay less in interest over the lifetime of the loan.

With this option, your debt should become easier for you to manage, though it is not immediately paid off. If, however, you can consistently make all of your payments, this option can also help to improve your credit score.

Differences between a Debt Settlement Agreement and a Debt Consolidation Loan

The main difference between these two debt relief options is that the former allows you to negotiate and only be responsible for paying a portion of what you owe instead of paying the full amount. With the latter, the amount of debt that you owe is not reduced through negotiations but instead is simply transferred into one place so that it is easier to manage.

A debt settlement agreement can also impact your credit score for 5 to 7 years depending on the total amount due, while debt consolidation should not impact your credit score unless you fall behind and begin to miss payments. If you can consistently make your payment every month, this will actually help to improve your credit score over time.

It is necessary to do your research when developing a comprehensive debt relief strategy. This will help you in coming up with a plan and a budget that actually meets your needs and does not cost you more in the long run. It is also important to only work with trusted professionals and organizations so that you can actually come up with a plan that is benefit for you. Contact us at Liberty Debt Relief to see how we can advice you towards more financial freedom.

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What You Should Know About Debt Consolidation

Is Debt Consolidation An Option for You?

Debt consolidation consists of a loan to combine all your unsecured debt into one place and pay off the balance gradually with just one monthly payment. Additionally, this option gives you the ability to have a potentially lower interest rate. It is crucial to note that this approach also comes with additional penalties if you ever fall behind on payments. Before considering this solution, it is essential to make sure you are thoroughly aware of the following aspects:

One Single Payment

With this solution, all of your debts are combined into one payment. If you are struggling with managing multiple payments all in separate accounts, this allows you to consolidate and ultimately makes it easier to budget and plan.

Does Not Immediately Pay Off Your Debt

One important thing to remember with debt consolidation is that your amount due is only consolidated, not immediately paid off. If you are having trouble making your payments due to financial difficulties, this will not reduce what you owe. However, your interest rate may be lower.

Lower Interest Rate

The lowered interest rates are what make this solution ideal for some. If you are struggling with multiple high-interest credit card payments, debt consolidation can help by lowering your rate and decreasing the overall amount of interest you are required to pay over the lifetime of the loan.

There is a Cost

There are often much harsher penalties imposed on these types of loans. For example, if you have to put up collateral (such as home equity or a car) to secure the consolidation loan and then fall behind on payments, you are liable to lose whatever asset you used.

Longer Repayment Period

To make up for the lower interest rate on a debt consolidation loan, you will be paying less each month. This means, depending on the amount of your monthly payment, you will have a longer repayment period. Depending on your financial situation this may not be a concern, but it is something to take into consideration when developing a debt relief strategy.

Can Help to Improve Your Credit Score

If you can consolidate your debt and consistently make your monthly payment, this will prove to the credit bureaus that you are financially responsible and adequately managing your debt. Eventually then, this will help to improve your credit score over time.

Debt Consolidation Pros and Cons

Pros

  • Single debt payment
  • Lower interest rate
  • Can help your credit score

Cons

  • Debt is not immediately paid off
  • Harsher penalties for missed payments
  • Could lead to a longer repayment period

Regain Control

It can be beneficial during this stage of debt consolidation to identify what caused you to fall so far into debt. Was it an unexpected expense that caused your budgeting to spiral out of control? Overspending? Or a medical emergency? Identifying why you are in debt will help you to determine what steps you can take going forward to avoid taking on additional debt or plan for the unexpected. Liberty Debt Relief can give you advice that keeps you in better financial standing.

Life happens, and debt is a common problem that many people face today. However, there are options, like debt consolidation, available to help you regain control of your finances and debt. It is essential to do your research and only work with trusted organizations to order to find sustainable debt solutions that work for you.

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How Debt Settlement Works

It can be overwhelming and stressful to manage enormous debt. However, there is a way to experience relief through debt settlement. This can be a great option for those with credit card debt, car loans, or outstanding medical bills. It is essential to thoroughly research all of the debt relief options available to you to make the best decision for your financial future and freedom.

What is Debt Settlement?

Debt settlement is an arrangement between you and your lender in which you agree to pay back a partial amount to settle your full outstanding debt balance. This process can take months or years depending on your lender and the specific balance that you owe. It is important to note that not all lenders are willing to negotiate these agreements, so this form of debt relief is not always an available option.

Another critical factor to consider is the potential impact that it can have on your credit score for roughly the next 5 to 7 years. Your credit score is a key metric used to determine your creditworthiness and overall ability to obtain credit. Debt settlement can have a significant impact on your credit score depending on the overall amount that you owe. That is why it is so invaluable to do your research and also only work with trusted professionals and organizations.

The Process

First, you must decide if you will work with a debt settlement company, a lawyer, or manage the negotiation process on your own. It can be incredibly difficult to handle negotiations without the right level of experience. There are, however, experts who specialize in working with lenders to negotiate the best possible outcome for you, but it does come with a cost. Specialists will often charge a fee, typically a percentage of the amount owed, which will be determined once your debt is settled, but having the proper background and experience is key to a successful negotiation.

If you are working with a debt settlement company, you will use the time during the negotiation to save the money you will offer your lender. This means that, if you are currently making payments towards your debt, you stop making those to your lender and instead send that amount to the company to accrue what you have saved.

Once you and your lender come to a written agreement, then you will finally be able to settle your debt and experience debt relief. It is important to note that the government and IRS will consider the debt that is forgiven as income. This means that you will also be required to pay any relevant taxes on this amount.

The Path to Financial Freedom

It can be incredibly frustrating to deal with a substantial financial setback while at the same time trying to regain control of your finances and debt. However, whatever your debt situation, know that there are options available. Debt settlement can be an excellent option for you to potentially lower the amount of money that you owe and ultimately help you to get back on the path to financial freedom. See how we at Liberty Debt Relief can help.

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