Debt Management Options
In the last ten years total consumer debt has increased 100% to over two trillion dollars. This increase in consumer debt means that many more people require debt relief services. As with any other industry consumers need to ensure that they are dealing with a reputable company. Knowing the options available for debt relief may help them to make an informed decision.
Consolidation of Debts
Most people have at least heard of debt consolidation but not everyone knows exactly how it works. Consolidation combines all or some of your multiple debts in a single, easy to manage monthly payment. Generally consolidation combines several high interest debts, such as credit card debts, into a loan with a lower interest rate. A lower interest rate means that you may have a smaller payment on this single loan than the total monthly payments of your various debts. This is the basic premise behind most consolidation plans.
In addition to consolidating multiple debts, some plans also reduce your discretionary spending. In these programs, your consolidation lender performs some of the same duties as an accountant would. Another thing that almost all consolidation programs have in common is that most of them require you to destroy your credit cards. Credit card debt is the number one cause of outstanding consumer debt, so destroying your cards could benefit you in the long term.
Negotiation with Creditors
Consolidation is only one of the options available to consumers experiencing financial difficulties. One other option is to use the services of a credit negotiator also known as debt managers. These professionals will negotiate with your creditors on your behalf in an attempt to reduce the total amount of debt you owe. They usually try to negotiate a lower interest rate for you or a reduction in the principle amount owed to your creditors. Often creditors are willing to accept these terms rather than risk you declaring bankruptcy, in which case they would receive very little if any of the amounts owed to them.
Keep in mind that neither one of these options are available free of charge. Even organizations that considered non-profit or public servants generally charge a small fee for their services. Almost every business needs to make at least a small amount above their basic expenses or they will be unable to continue providing their services. It is advisable that you examine the loan contract or other debt management agreement carefully prior to signing anything.
What you need to be Aware of
Some companies may incorporate substantial service fees or other “debt consolidation fees” into the principal amount of the loan. For example, if you have multiple debts totaling $50,000 a consolidation lender may give you a loan for $80,000. The $30,000 difference may consist almost totally of fees. The lender may also increase the term of the loan to encompass many more years. While the monthly payment on the loan may be quite low, you could actually pay more over the length of the loan than you would if you had higher payments and a shorter term. Other companies may place a variable interest rate on the loan. For example, the lender may offer you a loan with a low interest rate for the first year or two of the loan. After the first year or two the interest rate may increase dramatically and you may find yourself in a position where you have to negotiate the terms of your loan again with the lender to be able to continue making regular monthly payments. To protect your future credit rating and your hard earned money, it is advisable that you research several consolidation lenders carefully before choosing one.
Debt management and debt consolidation companies provide an important service in today’ consumer driven society. It is advisable to keep in mind, though, that these companies need to make at least a small profit to remain in business. As mentioned earlier, it is very important to do some research before choosing a company to work with. Through the process of researching available companies, you may even realize that you are able to negotiate on your own behalf.