Wednesday, December 16, 2009

When A Loan Modification Should Be Used Rather Than Debt Settlement or Debt Consolidation

A loan modification, debt settlement, and debt consolidation all accomplish the exact same thing. Each of these options can help to lower your monthly expenses. But a loan modification and debt settlement can actually eliminate a portion of your monthly debt, where debt consolidation will not. Debt consolidation will also require a min. credit score to qualify, where the other two options do not (in general)

Here is a brief overview of these three options:

Loan Modification

A loan mod is when the terms of a mortgage are changed to make it more affordable for someone who has experienced a hardship. In most cases, you will need to be behind on your payments and will need to prove your hardship to qualify.

There are three areas of a loan that are changed when a modification is approved. In some cases only one of the loan circumstances are changed, while in others, all three are changed.

1. The term of the loan
2. The interest rate of the loan
3. The payoff amount of the loan

By changing any of these three items (or all three if you are a good negotiator), the monthly mortgage payment will be drastically reduced.

Debt Settlement

This option is similar to a mortgage modification, because the term, rate, and balance are generally reduced for unsecured debt. Debt Settlement is not intended for mortgages, but can be used along with a loan modification. Debt settlement generally refers to reducing the balance or interest rate of unsecured debt (credit cards, mainly). In most cases, it's possible to take credit card debt that may have never been paid off otherwise, and reduce the balance and establish a fixed repayment plan. This allows the debtor to pay the debt of in just a few years, opposed to the rest of their life.

Debt Consolidation

Debt consolidation is the process of getting a larger loan and paying off a bunch of smaller loan. Generally this is done to get a lower percentage rate. Good credit is required, or enough collateral to secure the loan. Most debt consolidation loans are secured with real estate. A second mortgage or home equity line is common examples of a debt consolidation loan.

Each of these options can have a negative impact on your credit, however, they should all be a better option than bankruptcy (for your credit). If you have having financial troubles, or if you have to pick and choose which bills are paid each month, then it's time to start looking for relief. There is no reason to struggle each month because you are ashamed to ask for help.

Your Mortgage Company and/or credit card companies have put you (and most of America) in this position and it's time to take back control! Get your life back on track today by considering one of the options above.

1 comment:

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