Guest post: Are Debt Relief Services Legitimate Sources?

by hedy on September 20, 2013

Are Debt Relief Services Legitimate Sources?

Following the economic downturn and recession that weighed down the U.S. economy during the late 00′s, an increasing amount of Americans have been forced to rely on credit in order to finance their expenses and pay bills on time. As a result, debt levels have risen substantially, while interest payments take their toll on those burdened with large these outstanding balances.

With nowhere else to turn, some have resorted to debt relief or debt consolidation services, which claim to alleviate debt and make it more manageable to repay. While this sounds like a promising solution, can debt relief businesses really provide such a valuable service without any underlying risks or costs?

Secured vs. Unsecured Debt:

Before consulting a debt consolidation service, such as National Debt Relief borrowers, borrowers must know the difference between secured and unsecured debt. Essentially, secured debt is debt that is connected directly to collateral that will be repossessed if not repaid. For instance, auto loans and home mortgages comprise secured debt, as each debt relates to a particular item of collateral.

By contrast, unsecured debt is debt that has no inherent collateral. Credit cards carry unsecured debt, and borrowers who fall behind on credit card payments will not have their purchases repossessed but may be charged in other ways to cover the balance. When seeking debt relief, debt consolidation services deal specifically with unsecured debt.

Debt Consolidation

Debt consolidation, also referred to as debt relief by some businesses, is a legal operation that involves the conglomeration of a borrower’s high-interest unsecured debt into a more affordable monthly payment. While these services cannot be used to restructure auto or mortgage loans, debt consolidation can help with credit card debt, medical expenses, unsecured loans, personal loans, and utility bills.

What Are Some Debt Consolidation Benefits?

Fundamentally, debt consolidation will not reduce the size of the debt owned. Rather, debt consolidation seeks to provide the borrower with the means to pay his or her outstanding debt by lowering the interest rate and making payments more affordable. For borrowers who struggle to make payments on their debt due to lack of finances and high interest rates, consolidation services comprise a much more beneficial alternative to defaulting.

The Risks?

As with most services that involve debt alleviation, debt consolidation includes some inherent risks and is not necessarily beneficial for all borrowers with outstanding debt. Primarily, borrowers who decide to use debt consolidation risk of losing collateral assets; in the vast majority of cases, debt consolidation works by transforming of unsecured debt into secured debt, requiring the pledging of an asset as collateral for the balance. By putting an asset up as collateral, a borrower can receive the benefits of consolidated debt under a lower interest rate, however, they also put themselves at risk of losing the pledged asset.

As with many financial services regarding debt, consolidation can be tremendously advantageous for those who use it correctly and do not fall behind on their payments. As previously indicated, debt consolidation is not for every borrower; like credit cards, debt consolidation misuse can be financially harmful, while appropriate use of this service can be convenient and effective.

Dave Landry Jr. is a personal finance blogger and adviser who has been covering areas of finance for the past three years. Dave has also recently become a start-up business owner and also publishes business-related articles.

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