Find the Best Debt Consolidation in Waco, TX

How to choose debt consolidation in Waco

Almost 45 percent of Texans have debt in collections—much higher than the national rate of 33 percent, according to the Urban Institute. Juggling a variety of debts and monthly payments can be a costly headache, which is why some people choose debt consolidation, which includes debt consolidation loans and debt settlement.

A debt consolidation loan combines multiple high-interest debts into one single payment at a lower interest rate.

With debt settlement, you work with a company that negotiates with creditors on your behalf to reduce what you owe in unsecured debt. Unsecured debt includes credit card bills, medical bills, student loans and other debts without collateral. By contrast, secured debt, such as car loans and mortgage loans, is not eligible for debt settlement because creditors have a right to repossess the collateral.

Debt settlement might be a good solution if you:

• Are delinquent on accounts
• Already have a damaged credit score
• Think a creditor may accept partial payment
• Have $10,000+ in debt

If you have less than $10,000 in unsecured debt, there are options that include:

• Zero-percent interest balance transfer credit cards
• Debt counseling services
• Personal loan
• Home equity loan
• 401(k)

How does debt relief or consolidation work?

Debt relief agencies work to minimize your monthly payments. They contact your creditors to either reduce your interest rate or lower your monthly payments. Once this work is done, you pay the agency itself, who then distributes the money to each creditor for you.

Debt settlement companies charge a fee for their service, between $500 and $3,000 (sometimes higher, depending on your case). These fees are not applied to your debt and are for the service itself. This fee can be worth the total savings. A study by the Center for Responsible Lending found that, on average, debts are settled at 48 percent of the outstanding balance.

In addition to settlement fees, you may be required to pay federal taxes on your total payment, not the reduced sum. If settlement results in a debt reduction of more than $600, the IRS is notified and you will still have to pay taxes for the entire debt.

How long does it take?

While this is an effective solution, it’s not swift. Debt management programs typically take between two to four years to truly eliminate debt, assuming you make every monthly payment on time and in full. If you miss a payment, the agreement that your agency makes with your creditors can be voided.

The reason it takes this long is that the agency sets affordable amounts for you to pay monthly. The monthly payments to the agency do not go directly to your creditors; the debt relief agency will keep it until they can pay off your creditors in a lump sum.

Does debt consolidation affect my credit score?

Yes. With this solution, you will see an immediate decrease in your credit score because you stop payments to your creditors. Debt settlement agencies also require you to close all but one credit card, which also negatively impacts your credit score. But once you start paying off your balance, your score will eventually improve, although debt settlement will show up on your credit report.

Debt consolidation vs. bankruptcy: Which is better?

The Federal Trade Commission suggests that before you declare bankruptcy, you should work with a credit counseling service to create a debt repayment or settlement plan if possible. Bankruptcy has significant consequences, such as costly attorney fees and damaging credit scores.

Debt consolidation is a serious decision that impacts your life for years to come. Be sure to understand your options so you know what to expect if you decide this service is right for you.