First Person: Debt Consolidation Companies vs. Debt Consolidation Loans

Yahoo Contributor Network

I am a big fan of debt consolidation in order to reduce interest rates and fees and lower my monthly payments. However, there was a time when I did not know the difference between a debt consolidation loan and a debt consolidation company. I thought they were the same thing. They are not the same thing. A debt consolidation agency does not consolidate via loans, and a debt consolidation loan can be acquired through a bank or other financial institution that offers secured and unsecured loans.

Debt Consolidation Company

A debt consolidation company does not offer loans, and they do not pay off the account balances or close paid off accounts. A debt consolidation company negotiates on the behalf of the debtor.

When I called a debt consolidation company about lowering my monthly payments, reducing and eliminating fees and consolidating my payments into one monthly payment, I listened carefully to the customer service agent. The company would negotiate with each of my individual creditors to lower my monthly payments, bring my accounts current and reduce or eliminate current and future fees.

By allowing the debt collection agency to negotiate on my behalf, I was relying on their expertise in dealing with financial institutions, and because they had a lot of experience, I could expect significant reductions for each account I consolidated.

If I agreed to the process, I would send one monthly payment to the consolidation company. The consolidation company would remove their fee from the amount, divide the check and send the payments to my creditors for me. In other words, they'd handle the monetary aspect of physically paying my accounts, and I did not have to write multiple checks every month.

If I paid the consolidation company on-time and they processed my check in a timely manner, I could expect my balances to slowly reduce, and I could expect my credit score to go up. However, if I failed to mail the checks on time or their processing department processed my payments late, I could expect all my agreements to become void.

Debt Consolidation Loan

A debt consolidation loan is a loan product that's offered so that individuals can pay off all their outstanding, high-interest debts and consolidate them into a separate loan with lower interest rates. Banks and other lending institutions provide secured and unsecured loans for the specific purpose of debt consolidation.

An unsecured loan means that there is nothing backing the loan amount. If I agree to the loan and then became financially unable to pay it, my new loan would appear on my credit report as a delinquent account and might end up in the hands of debt collectors. However, that's the worst that would happen. With an unsecured loan, the financial institution doesn't have any collateral they can confiscate and sale to pay off the debt.

A secured loan is a loan that backed by a physical piece of property or an investment. Such items include homes, cars and jewelry. With a secured loan, if I stop paying, the financial institution can cease my property and sell it to pay off the loan.

If I were to take out a consolidation loan, I'd use my car as collateral. My car is worth about $2,000 which means that I could get a debt consolidation loan for about $2,000. This would allow me to pay off several small high-interest debts and then pay back the smaller interest rate loan.

There are benefits and risks associated with each of these debt consolidation products. Working with a debt collection agency puts me at risk for late payments. Taking out a separate loan could result in my losing property or becoming financially unable to pay back the loan.

*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.

Rates

View Comments (2)