In this age of plastic money and individual debt crisis, there is a whole new category of services that has emerged – debt relief services. These services are oriented towards people who are grappling with debt and need help to get out of the debt trap. Debt consolidation and management brings relief to a lot of people who are deep into debt. So, let’s take a deeper look at debt consolidation and management.
Debt management plan (DMP) is often provided by a credit counseling service. Their main aim is to help you get a hold of your finances and handle them better. Usually DMP service providers are non-profit organizations.
After a thorough study of your bills, debts and financial status, the debt management counselors give you financial guidance. They take you through ways and means by which you can reduce your monthly payments. A new plan and budget is sketched out to help you go ahead with your current bill payments.
More often than not these providers also negotiate with your creditors to reduce your monthly payments. Once you enroll into this program, each month you deposit a certain amount with your credit counseling company. The company will then make the required payments to your creditors depending upon the agreement arrived with them.
However, paying lesser amounts every month may sometimes lead to paying more than the total balance itself (due to longer duration of payments). It is always advisable to seek help from a certified counselor and ask them to estimate the time in which you will be debt free if you were to follow the debt management plan.
Debt consolidation (consolidating several high interest loans into a single large loan) might be a debt reduction/management strategy that your counselor might suggest to you. In fact, debt consolidation is a very popular option that is used by several people in order to better handle their debts.
Getting professional help is a good idea but make sure that you check the credentials of the debt management company/counselor before approaching them. Check with friends, family and others who have used their services before.
Educating the clients is top priority for the genuine debt management companies. Hence, they also offer services such as budget workshops, finance classes, one-on-one counseling, bankruptcy counseling etc. Since most of them are non-profit organizations, the professional counselors are available in the evenings on weekdays and on weekends. This will help you reach out to them without changing your work schedule.
Consolidating all or some of your unsecured loans into one unsecured or secured loan is called debt consolidation. The key words here are turning two or more high interest loans into one low interest loan.
A secured loan is given against an asset (usually a house), which serves as a collateral. Here the lender’s risk reduces significantly and this leads to a low interest loan.
In case of an unsecured loan, there is no collateral involved but then you have to pay higher interest rates. Consolidating two or more credit cards with high interest rates into one credit card (through balance transfer) is a good example of this kind of loan.
Besides helping you cut down the interest costs and reducing the debt pressure, debt consolidation also means that you need to make just one payment every month thereby reducing your mental effort of keeping a track of various accounts. This also helps you pay debt faster because you will be avoiding late fee payments and high interest rates. Moreover, it helps you get rid of the irritating calls from debt collectors.
However, if not done correctly, debt consolidation might have an adverse effect. For example if you consolidate your credit card debt into a low interest or no interest card but do not read the terms and conditions carefully… you might find that the zero-interest period is soon over (and you are back to higher interest rates) or you might find that these cards have hidden expenses. Hence, you might end up paying more than what you owe. So, choose a reputed lender/counselor and understand all terms and conditions carefully before you sign up.