Understanding The Alternatives To Debt Consolidation And Making The Right Choice

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A lot of people believe that debt consolidation will simply erase all their debt and allow them to move on as if nothing happened. This is absolutely wrong. When you get consolidation for your debt, you simply find a new lender who will pay off your existing debts. Afterwards, you still have to repay the consolidation loan and only when you have finished paying back the loan you can consider yourself debt free.

So What Is the Advantage of Debt Consolidation?

The main advantages of dealing with debt in this manner are related to your future. When you consolidate debt 9, your credit score will be affected, but not dramatically. Read more about credit srores here – http://www.toptenreviews.com/money/debt/best-debt-consolidation-companies/. Of course, if you want a quick way out of debt, there are alternatives, but you should be wary of their future consequences. Read more about debt consolidation loans.

Debt Management Programs

Entering this type of program means that you allow a financial counselor to negotiate with your creditors. The best they can usually achieve is a lower interest rate. Once an agreement is reached, the debt management company will handle the actual repayment of your debt to your creditors. You will pay to the debt management company the monthly installments (which include their fee) and you will never hear from your creditors again.

This alternative is something similar to debt consolidation, but it will show up distinctly on your credit report and will lower your credit score.

Debt Negotiation

In debt negotiations, you settle with your creditor for a lump sum payment of a portion of your debt, and the rest of it is written off. Seems like a really good deal at first. You actually end up paying less than what you owed. However there is one issue and one caveat related to this option.
The issue is that you have to come up with the full amount of the lump sum and it is usually not be less than 75% – 80% of what you owed. You do not have the negotiating power and the creditor may resort to other options to reclaim your debt.

The caveat is that debt negotiation will hurt your credit score badly. In the next 5 or 6 years you will definitely find it extremely hard to open a new credit card, or to get approved for a mortgage loan.

It is important to think of the future, not only of the present moment, when you decide what option to choose to alleviate your debt load. Out of the tree options presented above, debt consolidation is the most appealing because it has the smallest impact on your financial future.

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