Pros and Cons of Debt Consolidation & Credit Counseling

Both debt consolidation and credit counseling are popular techniques for managing and eliminating debt. Debt consolidation involves the combining of several unsecured debts under one low-interest loan. Typically, consumers will consolidate their debt using a home equity loan, as personal loans may carry higher interest rates and be more difficult to obtain unless a consumer has a great credit score.

Credit counseling is a very different technique. Consumers that choose to enroll in counseling will be assigned a credit counselor who will help them budget their income, repay their debts, and even lower their interest rates.
Detailed below are the pros and cons of debt consolidation and the pros and cons of credit counseling.

The Pros and Cons of Debt Consolidation

Pros:

  • Consolidates bills into one convenient monthly payment.
  • Most consolidation loans carry lower interest rates than credit cards. This may help consumers save money on their monthly payments and make their bills more manageable.

Cons:

  • If the consumer is unable to make their loan payments, they will lose the collateral that secured their loan. If a consumer is unable to pay a home equity loan, this means that they would lose their home. This makes these loans very risky.
  • To qualify for a consolidation loan, consumers must have decent credit. While secured loans are easier to qualify for than unsecured loans, they still carry minimum credit requirements.
  • Home equity loans are only available to those with enough equity in their homes. Some consumers will not qualify.

The Pros and Cons of Credit Counseling

Pros:

  • May help consumers save money on interest payments.
  • Helps consumers maintain or increase their credit scores.
  • Allows consumers to make one monthly payment to their credit counselor, who will properly distribute the funds.
  • Credit counseling help consumers avoid missing payments or making late payments. This will save money on late charges and others penalties.

Cons:

  • Credit counseling rarely offers a large monthly savings.
  • These programs carry a high drop-out rate, mainly because the payments can be difficult to keep up with.
  • Typically takes five years to pay off debts, which is much longer than other debt relief methods.
  • These programs can be expensive. Many charge monthly fees which quickly add up since the programs last for up to five years.

Which is the Better Choice?

Both of these debt relief methods can be beneficial in some situations. Because there are no specific credit requirements, credit counseling is a more accessible option than consolidation loans. However, these two methods are not the only debt relief options available to consumers. Consumers may also want to consider enrolling in a debt settlement program if they are struggling or unable to pay their bills.