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Using debt consolidation loan as a debt solution is the first option that consumers usually think of when they are faced with mounting credit obligations. In truth, this is an effective option but only if you have the right qualifications and attitude towards it.
Some financial experts doubt the effectiveness of using one debt to pay for another. It is not really viewed as a solution because you are merely shifting your dues so your payments will not be as difficult as before. Instead of dealing with multiple creditors, you apply for a loan that is big enough to pay for all your other debts. That way, you will be left with only one lender and debt to pay for month on month.
However, there are a couple of things that you have to consider before you choose this as your debt solution. First of all, you must possess either a good credit score or a collateral to avail of a low interest loan. This will ensure that your monthly payments will be smaller than your current. But if you do not have both, you may want to consider other debt relief programs that can give you better results based on the qualifications that you have.
Instead of consolidating with loans, use Debt Management
If you think that your qualifications are ill-suited for debt consolidation loan, you may want to consider debt management instead. The latter is another type of consolidating debts but this time, no loan is required to make it possible. Instead of a loan helping you to combine what you owe, a credit counselor will be used instead. Here are important points that you need to know about debt management.
The program begins with credit counseling wherein the credit counselor will analyze your finances and debts to see how you can best solve it.
Once the data is analyzed, the credit counselor will discuss with you the different options that you have in terms of debt relief.
If you qualify for debt management, the counselor will discuss the process and the fees that you will go through.
When you agree to use debt management, you will create a debt management plan or DMP that will contain your suggested low monthly payment scheme. The low payment will be possible because the counselor will lengthen your payment period.
The counselor will give the DMP to creditors to approval and will negotiate on your behalf for the lowering of your interest rate. If they agree, that will mean more of the monthly payments will be used to pay off the principal debt.
Once approved, you will send the total monthly payment to the counselor who will take care of disbursing the payments to your different creditors.
The benefit of this is you don’t need to have a good credit score or a collateral. However, the lower interest is not really guaranteed - but the counselor will put their best effort to provide this.
Of course, the linchpin here is to find a trustworthy and reliable credit counseling agency that will help you out. To find them, you may want to start your search by going to the membership list of the National Foundation for Credit Counseling or the NFCC. Reputable organizations such as this will help link you to legitimate counseling agencies that can assist you in getting out of your credit problems.
Another important reminder is you should have a steady income. There is no debt reduction here and if you cannot afford the payment, debt management will not work for you.
When making a loan to pay for debt is not enough
In case you need a debt reduction because your income is not enough, the best alternative for debt consolidation loan is debt settlement. There are several benefits to a debt settlement plan. When you decide to use this as a debt relief option, here are the things that you should know about it.
Debt settlement works best for unsecured debt like credit card debt, medical bills and other personal loans.
Debt settlement will require you to default on your payments intentionally to help convince the creditor that you are in a financial crisis.
The default on monthly payments will lower your credit score but will allow you to save up for a settlement fund.
The settlement fund will be used to negotiate with creditors. You will ask them for a debt reduction by offering an amount that is lower than what you owe. You will tell them that you can only afford to pay this amount and if they cannot accept, you will be forced to petition for bankruptcy.
During the negotiation, you will start with an amount that is lower than what you have on your settlement fund. This will give you room to negotiate.
Once you and the creditor agree on a settlement amount, make sure you hold a document that states the forgiveness of the debt balance once you have paid the agreed amount.
This program is quite stressful but you have the option to hire a debt professional to help you out. Just like with a credit counseling agency, you may want to start your search by looking at trustworthy debt settlement companies through a reputable organization. One of them is the AFCC or the American Fair Credit Council. Look at the members to see who among the companies on the list you can work with.
If you want to know more about how you can do your own debt settlement, here is a video that we have created for you. Watch it to know how you can be successful in settling your own debts.