Debt consolidation is a debt management approach that combines several high interest loans into one settlement plan resulting in a single monthly payment over an agreed period of time. The main goal of debt consolidation is to bring relief to an embattled borrower by lowering monthly payments and reducing interest rates. If done right, debt consolidation can help improve your credit scores and accelerate debt payment.
There are three major debt consolidation options to choose from in seeking release from the burdens of debt:
- Debt consolidation loans
- Debt settlement
- Debt Management Plans
Debt Consolidation Loans
Acquiring a large debt consolidation loan to pay off multiple debts is likely to result in reduced monthly payments and lower interest rates besides simplifying your monthly cash flow situation.
There are two types of debt consolidation loans: the unsecured and the secured loan.
An unsecured debt consolidation loan may not be possible if your credit rating has been badly hit by previous histories of delayed or missed payments and you’re considered by creditors as a high-risk borrower.
A secured debt consolidation loan, on the other hand, involves using an asset or home equity as a guarantee for the payment of the newly acquired loan. A secured loan can mean a much lower interest rate and a single monthly payment. However, consolidating unsecured consumer debts into a single loan and putting your own home as a security is both risky and unreasonable. You can lose your home if you fail to pay previously unsecured loans and this is not at all advisable. Most financial advisers will tell you to stay away from obtaining secured loans to pay off unsecured debts.
Debt settlement involves negotiating with present creditors through a debt settlement company to pay off existing debts at reduced amounts. Most debt settlement plans require making monthly payments to a debt resolution company until there are adequate funds to pay off present debts at negotiated amounts. Debt settlement works much like debt consolidation because a single monthly payment is made to a debt settlement company instead of making multiple payments to several creditors.
Debt Management Plans
A Debt Management Plan, or DMP, involves the participation of a debt management company in the consolidation of multiple loans to a single monthly payment at reduced interest rates and possibly lower monthly payments. A debt management plan is the highly preferred debt consolidation approach because a borrower is more likely to stick to a debt payment plan that is within his or her capacity to pay.
Under a debt management plant, the debt management company evaluates the borrower’s financial situation, works out a debt payment schedule, and negotiates with the creditors. A well-implemented debt management plan may not harm your credit ratings.
How to Settle Your Debt Completely
The road to a debt-free life is not easy and you will have to make sacrifices along the way. Recognizing that you have a financial problem and that you need help is a major breakthrough but it doesn’t end there. You have to address your debts and make a resolve to repay and negotiate for the best terms possible to settle your entire debt.
A debt management plan or debt settlement plan offers the most advantageous terms for consolidating your loans because both options will not require you to risk your home or other major assets such as your retirement plan. They likewise result in huge savings in principal and interest amounts and in convenient single monthly payments. At the end of the negotiated debt payment period, you can be totally debt free and enjoy life to the fullest.