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Frequently Asked Questions What is debt consolidation? How does the program work? How much money can I save by consolidating my debts? How is debt consolidation different than a loan? Why is getting a loan to pay off your debt financial suicide? Why would my creditors lower my interest rates and monthly charges? Why can't I just file bankruptcy to erase my debt? How do I choose a debt consolidation service? What is debt consolidation? Debt consolidation is a relatively new program dealing with debt that is becoming extremely popular. The program is associated with non-profit consumer credit counseling organizations. Although it may sound like a debt consolidation loan, debt consolidation is entirely different. Unlike a debt consolidation loan, your debt is consolidated and your interest rates* are reduced without the need for a loan. This is done through negotiating with your creditors rather than taking on additional debt. Debt consolidation services are a win win situation for the consumer. The consumer gets their interest charges* reduced, their monthly payments minimized with the convenience of paying all their debts in one monthly payment. By making the regular monthly payments, the consumer will be back on the road to restoring their credit rating. It is no wonder that debt consolidation services have become the number one recommended way of dealing with excessive debt. How does the program work? A professional credit counselor will contact your creditors to get your interest rate* and monthly payments reduced to an amount that you can afford to pay. Our counselors have working relationship with these creditors and know exactly how to get the best deal for you. For example, if you have a $5,000.00 debt with MBNA at 21% interest, our counselors will work with MBNA to significantly lower your interest rate and monthly payments. Typically, we can lower your monthly payments by 10-40% while reducing your interest charges.* Most of your monthly payment will be toward principal not interest. You no longer pay your creditors directly. All of your debts are organized into one manageable, reduced payment to the debt consolidation company. The debt consolidation company in turn pays your creditors on your behalf. How much money can I save by consolidating my debts? We can lower your monthly payments and interest rate* for most of your unsecured creditors. In some cases, we can even eliminate interest charges* altogether. Your entire monthly payment will be toward the principal. The savings over the repayment period are dramatic. Below is an example of the typical amount you might save in interest charges if you used a debt consolidation service and owed a credit card company $3,500.00:
You have seen debt consolidation loans advertised and they may look like a good idea. These loans work by giving you a bank loan against your property, you use the money to pay off high interest credit cards. Typically, you are required to use the equity in your house as collateral. The problem is that most people who are in deep debt do not have equity in their homes and the ones that do have equity are concerned (rightfully so) about taking on more debt. In order to reduce your debt, you need less credit not more. Increasing debt by mortgaging your house is typically financial suicide. Many people report that re-financing with a consolidation loan or a second mortgage pushed them over the financial brink. Under these circumstances, the loan or mortgage you do obtain (if you qualify) will have a very high interest, and though you will appear to be making progress, you will only be digging yourself in deeper in debt. A common myth is that debt consolidation loans are tax deductible. This is only partially true. Interest paid on mortgages that exceed the value of the house, used to repay credit cards or personal loans (called unsecured consumer debt) is not tax deductible. Why is getting a loan to pay off your debt financial suicide? Let's say by pledging your house as collateral, the banks gives you a loan and you pay off all your high interest credit cards and loans. So far so good — now you only have the loan to pay off. BUT — your credit cards now have a zero balance and inevitably, you buy a few things here and there, and before you know it — your credit cards are back at the limit. Now you have the consolidation loan and the credit cards. Everybody says "No that won't happen to me" or "I'll never do that" but people do this every day and end up worse off than when they started. In a study of the efficacy of debt consolidation loans, the FDIC concluded that "… some consumers will increase credit card and other consumer debt after a debt consolidation package is completed, thereby weakening their ability to repay outstanding debts and increasing the likelihood of bankruptcy." Why would my creditors lower my interest rates and monthly charges? Before you say this sounds too good to be true, keep in mind that your creditors are not lowering your interest rate and making it easier for you to make smaller payments out of the goodness of their heart. They realize that if they don't help you out a little, you may file bankruptcy and they will likely collect nothing. Through debt consolidation services they can at least recoup the principal on the debt. In addition, you will notice that most debt consolidation companies are organized as non-profit companies. This allows the credit companies to recoup a significant portion of the lost interest charges through tax write-offs. So take advantage of this great service. It seems to be one of the few true win win situations out there for the consumer. Why can't I just file bankruptcy to erase my debt? You may feel your debt is overwhelming and bankruptcy is the only way out. Or, you may feel it is the easiest way to start over. Bankruptcy may be your best option, but it is something to consider carefully. A bankruptcy stays on your credit report for eight years and you will pay much higher interest rates for every type of loan or financing. How do I choose a debt consolidation service? You want creditors off your back. You want to relax and feel your finances are being professionally managed and your credit is being restored. Our debt consolidation pros will make sure you are matched with a debt consolidation professional experienced dealing with creditors and lenders. We will get the best possible repayment plan for you. Your professional will ensure that creditors no longer call or attempt to harass you. You won't have to deal with creditors. *In most cases based on the creditor's present Debt Management Program (DMP) rates |
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Free Debt Analysis Home | Company Profile | Consolidation | Counselors | Testimonials | FAQ | Contact Us Privacy Statement | Clients | Newsletter American Debt Counseling, Inc. 14051 NW 14th Street, Sunrise, FL 33323 Phone: (954) 656-8080 Fax: (954) 656-8113 © 2001, 2007 |
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