What is Accelerated Debt Consolidation?
High debts from multiple sources can be difficult to deal with. Borrowers not only have the headache of making tons of payments each month, but each debt may have a high interest rate that makes paying them off challenging. This is a common problem for many people, and they may investigate services like debt consolidation to help remedy the problem. In some forms of debt consolidation all debts, including things like house and car payments, which are called secured debts, are lumped together into a single loan. An alternative plan is to use accelerated debt consolidation, which only deals with unsecured and typically higher interest debts.
When unsecured debts are added to secured debt, this isn’t really accelerated debt consolidation. The goal is to accelerate or speed the process, and not add to secured debt. Refinancing a house for instance to pay off credit cards wouldn’t usually fall under this heading. It doesn’t get rid of hospital bills, credit cards or personal loans, though it does convert them to a single loan and usually one with lower interest.
Accelerated debt consolidation is often spoken of in terms of using credit counseling services. These companies work with borrowers and lenders to create a pay-off plan that will help get rid of debt sooner, hence the term acceleration. The goal is to combine unsecured debts at reduced interest rates so that all debts are paid sooner.
With one monthly payment to the credit counseling service, which can include fees to use that service, the debt is gradually paid down. Provided the borrower doesn’t start accumulating additional debt, in a few years, he or she may not have any more unsecured debt. The credit counseling service becomes responsible for distributing the money to debtors, which can take some of the work out of paying bills. Using this type of service may mean people no longer have access to their credit cards for spending. Credit card lenders may be loath to continue allow people to borrow more money if they’ve had to reduce interest rates.
Another way to use accelerated debt consolidation is to take all unsecured debt and convert it into a single lower interest loan. This may be an option for people with fairly good credit who can obtain a personal unsecured loan for a high amount. It might make it easier to pay off debt and it means borrowers retain the use of things like credit cards. The disadvantage in this scenario is that debt can accumulate again quickly.
There are other ways to accelerate paying off debt that don't involve accelerated debt consolidation. Financial experts like Suze Orman recommend making highest payments each month to the debts with the highest interest rate, while paying minimum amounts on lower interest rate cards. Even if people owe less money on lower interest rate cards, it saves money in the long run to pay off higher interest rate cards first. Of course, this doesn’t consolidate the debt, but if a borrower only has a couple of credit cards, it may help pay them off sooner.
Written by Tricia Ellis-Christensen
