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Debt Consolidation 101: An Expert Opinion

Between credit cards, student loans, and other financial obligations, debt can pile up quickly. If you're seeking a repayment strategy that can provide much-needed relief, you've likely heard about several debt-relief options like debt consolidation. But is debt consolidation a good idea for your financial situation?

American Financial Solutions has been serving clients in need of realistic debt relief solutions since 1999. Find out more about what debt consolidation is and the other options available.

Key Takeaways:

  • There are several ways to pay off debt.
  • Debt consolidation can work but isn't the best solution for everyone.
  • Working with a non-profit credit counseling agency is often the best option.

What Is Debt Consolidation?

Debt consolidation means that multiple debts are rolled together into a loan, allowing you to slowly pay them off with one convenient monthly payment. Essentially, you're paying off all your smaller loans with a new one. This is a common method for individuals with high-interest debt. Through debt consolidation, you may do the following:

  • Pay off your debt faster.
  • Pay off your debt in one lump sum, rather than making multiple payments across creditors.
  • Reduce the time to repay debt because you have one loan with a set number of payments, rather than changing monthly payments. 
  • Possibly lower your interest rates overall.

As one of several financial management solutions, debt consolidation programs are often confused with other methods, such as debt management and debt settlement. Here, we offer some clarity on these programs:

Debt Consolidation vs. Debt Management

An alternative to debt consolidation, debt management is where a certified counselor works with your current creditors to create a repayment plan under the best terms possible. In this approach, you don't have to qualify for a new loan or credit card – the credit counseling company consolidates your bills into one monthly payment and requests that creditors lower your interest rates and monthly payments.

Comparing debt management and debt consolidation plans is a great way to figure out which solution is best for your situation.

Debt Consolidation vs. Debt Settlement

Another alternative that people often turn to is debt settlement. This is an approach that involves working with current creditors to negotiate terms that allow you to pay less than the total amount owed. While this shorter pathway to a debt-free life may sound appealing, it involves high fees, potential tax liabilities, a severe credit score impact, and other pitfalls.

“I paid off all my credit cards today!  Thanks so much for all your help! My Financial Goals has been a savior to my credit and peace of mind. I appreciate all your help and refer friends and family all the time.”

Sincerely, Christina

Debt Consolidation Loans Aren’t for Everyone

Debt consolidation loans work well for many people, but there are other options to consider. Certain requirements for consolidation loans limit the number of people qualified for them. By working with an American Financial Solutions certified credit counselor, you can find the best debt solution for you. Our team is trained to work with clients in a compassionate, non-judgmental way, helping each person feel comfortable as we learn their story and discuss solutions.

What Are the Risks of Debt Consolidation?

Taking out a new loan or credit card to pay off debt comes with a certain level of risk. For instance, your credit score may go down when you take out a new loan, which can affect your ability to take out future loans. And if you continue to use the credit cards you've paid off, you could risk going deeper into debt.

Your credit counselor will review these and other risks during your consultation.

Debt Consolidation May Not Be Best for You

When it comes to debt relief, there isn't one right answer for everyone – some people aren't good candidates for do-it-yourself debt consolidation programs. Key things to consider include:

1. Debt Consolidation with Bad Credit

To qualify for a debt consolidation loan, your credit score and repayment track record must prove that you can repay the loan.

2. The Importance of Your Debt-to-Income Ratio

This ratio indicates how much debt you have in relation to your income, helping lenders realistically gauge your ability to make monthly payments on time. If your DTI is high, you could be forced to explore other options.

3. The amount of Debt You Need to Consolidate

Unsecured debt consolidation loans have limits and increasing interest rates based on risk. You need to determine if you qualify for a loan that will pay off your existing debt at a rate that justifies the move.

“Thank you for helping us to be free of phone calls, threatening letters and everything else that comes with being so far in debt. We recommend your services to anyone who wants to become debt free.”

Barry & Tanna S.

Debt Consolidation Alternatives

If debt consolidation isn't the right option for you, know that you're not alone. There are other ways to build a solid foundation for the future and create a realistic plan that will help you gain control of your finances. American Financial Solutions specializes in creating debt management plans for customers who need support.

An Introduction to Our Debt Management Plan

Why choose American Financial Solutions? Our certified credit counselors have established a rapport with hundreds of creditors. When clients enroll in a debt management plan, we work with their creditors from a place of experience to help achieve the best possible outcome.

This may include waived fees, lower interest rates, and lower monthly payments. Plus, our customers gain the peace of mind that comes with knowing someone is on their side every step of the way.

Consider our debt management plan, where a certified counselor works personally with your current creditors to create a repayment plan for you.

Manage Your Debt with American Financial Solutions

American Financial Solutions is a non-profit organization and a proud member of the National Foundation for Credit Counseling (NFCC). We help people manage their debts and make informed financial decisions. Our certified credit counselors will review your entire financial situation, learn your goals, and discuss your options. We will also help you navigate the differences between debt consolidation, debt management, and debt settlement in a way that's simple to understand so you can make the ideal choice.

For millions of people, a smart, personalized program is just what they need to consolidate debt and pave the way toward a more secure financial future. To get started or learn more information about our debt consolidation programs, contact us today.

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