One way to become debt free is to consolidate your debt and get help through a debt consolidation company. Consolidation is when one agency, such as a debt consolidation service or a bank, purchases debt from another firm, such as a credit card company. They then combine all of the debtor’s debt into one single loan that the agency then pays off to the new creditor. This is an advantageous method for several reasons. There are pros and cons of each debt consolidation service and here are a few that may interest you.
One advantage of consolidating your debt is that it can often reduce your monthly outgoings by thousands of dollars. By reducing the number of creditors you pay to, your financial situation will appear less severe and therefore you will have a better credit rating. The reason why creditors are willing to forgive small amounts of debt is because the creditor expects to eventually recoup at least part of their investment from the borrower. By reducing your outgoings, you may well save money each month too. However, there is usually a downside to debt consolidation too, as you will probably have to change your lifestyle to maintain the new budget you have created.
The disadvantages of debt consolidation are that if you want to refinance your house or purchase a car, you will need to talk to the bank about a new repayment plan. You will need to keep the original balances, so that you have payments to make to the debt consolidation company. You also will have to agree to a long term agreement about the amount of interest you can charge on your credit cards. Another disadvantage is that if you get into trouble with late repayments, you could be hit with legal action from your creditors, so it is important to be careful. Also, many creditors will only consider accepting a debt consolidation loan if your debts are relatively small.
Another way of managing your multiple debts is to apply for a debt management program. With this type of plan, you set up a repayment plan with a repayment officer who will be in touch with your lenders. You can then arrange for the debt relief company to deal with your lenders directly. There is also the option of using an agency to deal with all your lenders. These companies will arrange with your lenders on your behalf, but you still need to keep in contact with them yourself to make sure you are keeping track of how much money is going out and how much money is coming in. Most people find this form of managing their multiple debts much more manageable than the alternative of bankruptcy.
Of course, the disadvantage of debt consolidation is that you may end up paying more interest than you would with a debt consolidation loan. Also, the longer you use this method of managing your debts, the lower your credit score becomes, as your debts become older. This can take several years, so if you have a very poor credit score, you may be stuck with very high interest rates for several years, instead of the few years you would have had with a debt consolidation loan.
Finally, you must consider whether using a debt consolidation loan or managing your debts in this way will be a better solution for you in the long run. While both can be effective, it will depend largely on how well you know and understand your creditors. If you have a lot of unsecured debts and few creditors, consolidating them into one loan will often do your financial well. However, if you have many secured debts and a lot of creditors, managing those debts directly can be more efficient. Both methods have benefits, but if you want to be sure that you are getting the most efficient use of your money, and if you have a lot of unsecured debts, a debt consolidation loan is probably the best option.