Debt consolidation and reduction are the most effective tools available to deflate the debt bubble. Both these options deploy entirely different tactics to tackle debts and it is up to a debtor to choose the one that suits his/her needs better. Here is a closer look at the constitutional features of debt consolidation and reduction.
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Debt consolidation
Debt consolidation, in essence is a procedure wherein you take a single loan and pay off your outstanding debts using this loan. This way scattered debts are cleared off using a single loan. Debt consolidation is a very effective program to counter high interest rates on multiple debts. Since consolidation loans are offered at impressively low interest rates, clearing away unconsolidated debts saves up a lot of money on the interest that would have been levied on individual debts.
Another feature of debt consolidation is that it relieves you of the requirement to make multiple payments for each of your debts. Since isolated debts are knocked off by taking up a single loan, a debtor needs to focus on a single monthly payment towards this consolidated loan. Therefore debt consolidation proves a respite from juggling between multiple debts and the corresponding payments.
Consolidation loans, however, come at a price and require a collateral to be put up. This converts your unsecured debts into secured ones and you run the risk of losing your collateral in case you are unable to meet the payment obligations.
Credit cards debt consolidation
Most credit card companies offer balance transfers at low rates. This enables a debtor to transfer his/her outstanding balances onto a single, low-cost credit card. This is particularly beneficial to consumers who owe multiple credit cards thereby attracting significantly high interest rates on outstanding balances.
Most balance transfers are low cost affairs. However, a consumer needs to be well aware of the terms and conditions of the transfer as many companies offer low rates on a time-bound basis. Consumer should enquire about any such rates and read the listed terms and conditions carefully for any hidden fees or adverse clauses.
Debt reduction
Debt reduction programs are a great solution for cutting down unsecured debts. There are a number of professional debt relief companies that offer skilled and professional help to reduce debts. Debt reduction takes place by way of negotiations between creditors and debtors. A debt reduction company generally takes up the proceedings on behalf of the consumer.
These debt reduction agencies take a stock of an individual’s finances and debts. After doing an in-depth assessment of the scenario, the counselors plan a course of negotiations with each creditor. These negotiations often settle with a lower rate of interest on the debts, waiver of certain fees or charges, or an outright decrease in the amount of the debt.
Once the settled terms are laid down, the debtor may either be required to pay a lump sum amount to the creditors at one go and clear the debts away, or make regular monthly payments. The one-time payment is effectively lower than the original and the debts are taken to be settled once the creditors receive the agreed amounts.
Most debt reduction companies require that debtors make fixed monthly payments to them. The payments are accumulated over a period of time and are handed over to the creditors. This amount is in tune with the chalked out terms that resulted out of negotiations between the creditors and debtor.
Debt reduction, however, puts your credit report under the scanner and has an undesired affect on your credit score. A reduced or settled debt mentioned in your credit report may not go very well with the credit companies and you may have to go stretch yourself a little extra to get a new credit card or loan etc. However, these hardships are any day better than filing for bankruptcy, which tames down your credit worthiness big time and is a big blemish on your credit report.
Debt reduction companies generally charge their clients on a monthly basis. Alternatively, some companies may charge a cut in the debts they settle. Whichever way it works, the terms and conditions should be very well documented and you should read the dossier carefully before signing up for any such program.
Debt consolidation and reduction, both are used extensively for debt management; however, the applicability will vary based on your debt situation.