It’s unpleasant but true that carrying a huge load of debt can make your life just miserable. You can even suffer physical issues due to the stress related to trying to cope with debt. Fortunately, there are several options for getting out from under that debt. Two of the most popular are debt consolidation and debt reduction.
Why choose debt consolidation
The most popular way to consolidate debts is through a debt consolidation loan. This is almost self-explanatory. You just borrow enough money to pay off all of your other debts. If you are able to get one of these loans, you should end up with a lower monthly payment and a lower interest rate.
The negatives of a debt consolidation loan
The biggest problem with a debt consolidation loan is that it does nothing to reduce your debt. If you owe, say, $20,000 to four different credit card companies and take out a loan to pay them off, you would still owe the $20,000. You just owe it to a different lender. In addition, a debt consolidation loan will likely cost you more money over its lifetime. As an example of this, if you were to take out a 7-year debt consolidation loan at 6% to payoff that $20,000, you would end up paying $4542 in interest charges.
Why choose debt reduction
These are two of the reasons why more and more families are choosing debt reduction over a debt consolidation loan. Debt reduction, which is often called debt settlement, is better than debt consolidation in that it can actually reduce the amount of money you owe on unsecured debts. When you owe less money, you can get out of debt quicker. Plus, you should have a much more affordable payment plan.
The cons of debt reduction
The biggest con of debt reduction or debt settlement is that it’s not for everyone. You must owe at least $10,000 and must be six months behind in payments on your unsecured debts to be a good candidate for debt settlement. In addition, debt settlement will have a negative effect on your credit score. Some financial experts believe that debt settlement will drop the average person’s credit score by around 80 points. This could easily move you from having an “average or OK” score to a “low” or even “poor” credit score.
Why people choose professional debt reduction
While there is no reason why you couldn’t do debt reduction or debt settlement yourself, most people choose to hire a professional debt settlement company. There are two good reasons for this. First, many people are a bit leery about trying to negotiate with their creditors or simply don’t consider themselves to be good negotiators. Second, it’s almost impossible to negotiate a settlement unless you have the money in hand to make an immediate cash payment to the creditor. To put this another way, if you are able to negotiate a $5000 debt down to $2500, you would need to have that much money available to immediately send the creditor in the form of a check or wire transfer.
And the winner is
Whether you choose debt reduction or a debt consolidation loan, is totally up to you, given your financial situation and your personal preferences. Would you like to be out of debt in four years or less? Or would you rather take more time to pay off your debt so that your credit score would not take a hit? Do you think you could handle the payments on a debt consolidation loan or do you owe so much you would never be able to make the payments on the loan? These are the types of questions you will need to answer before you can determine which is best for you – a debt consolidation loan or debt reduction.