Debt Consolidation vs. Debt Consolidation Loans: What is the difference?

Debt consolidation is the practice of consolidating multiple bills and payments into a single payment through some type of debt repayment plan or program, offered by a debt consolidation provider. The two main types of debt consolidation plans are a Debt Management Plan (DMP) and a Debt Settlement Plan (DSP).

A debt consolidation loan is a loan obtained from a lender, with the purpose of paying off the outstanding loans and debts you currently have. With a debt consolidation loan, all of your monthly payments are consolidated into one payment, which is made to the new lender.

How It Works

With debt consolidation, you do not borrow any money. Instead, all of your unsecured debts are consolidated into one monthly payment that is administered by your debt relief provider to the appropriate creditor(s), based on the debt consolidation plan you are enrolled in.

The goal of a debt consolidation loan is to use one loan to pay off your outstanding bills and debts, and to decrease your monthly payments by lowering your overall interest rate, and amortizing your debt over a longer period of time.

Advantages

There are several advantages to enrolling in either type of debt consolidation plan:

• You are not borrowing additional money, on top of the money you already owe, to secure a new loan.
• You are able to consolidate your unsecured debts into one fixed monthly payment to make to your debt relief provider.
• Your monthly payment is usually lower.
• Collection calls usually begin to lessen after the first few months of making consistent payments.
• With a debt consolidation program, you are no longer able to use your credit and store cards, so it is very difficult to accumulate additional debt while enrolled in the program.

Advantages to debt consolidation loans include:

• You only have one fixed monthly payment to make to your lender.
• Your monthly payment is usually lower, which means more monthly cash flow in the short term.
• Your consolidation loan interest rate should be lower than your current interest rates.

Disadvantages

Some of the disadvantages to enrolling in a debt consolidation program include:

• Enrollment can have a negative effect on your credit.
• Enrollment can limit your ability to acquire new credit while you are enrolled.

Some of the disadvantages to obtaining a debt consolidation loan include:

• A debt consolidation loan does not lead to debt elimination. All it does is shift the debt, which has to still be paid at a later date.
• Because all the loans are shifted to a single lender, all of your credit cards will now show huge available amounts. This can be very tempting for someone who is used to living off of credit cards, and can lead to another spending spree and even more debt.
• Almost all debt consolidation loans are secured, so whatever property you attach to your loan is at risk should you fail to pay.
• By consolidating the debt, the loan payments are stretched for a longer time period. This means that your payback period is stretched, so you will be in debt longer than you would have been otherwise.

Types

The two most common types of debt consolidation plans are a Debt Management Plan (DMP) and a Debt Settlement Plan (DSP).

Debt consolidation loans vary by repayment terms. The duration and interest rates of these loans are determined by your credit rating. Some examples of debt consolidation loans include home equity loans, personal loans, and credit card balance transfers.

Requirements

In order to qualify for debt consolidation with CareOne, you must:

• Have $2,500 or more in unsecured debt
• Have at least two creditors that need to be repaid
• Have a source of income

In order to qualify for a debt consolidation loan, you may need to:

• Have enough equity in your home that you can use it as security or collateral (without a home you can consolidate your debts, but the amount you can consolidate is very minimal)
• Prove that you are paying all of your debts on time by showing your payment history
• Show stability by having lived in the same place for at least two years
• Have a source of income