How Consumers Become Debt Free

In the past years there has been a rising problem with individual debt. The average US household is estimated to have up to $20,000 in non-mortgage debt. Because of these large debts most people are unable to pay off their debts without professional help. Debt relief isn't something that happens over night, but there are a few ways to help you achieve it.

An individual may take out a loan in order to pay off other loans that they already have. The act of taking out a loan to make payments on previous ones is known as debt consolidation. The primary reasons for debt consolidation are to secure a lower interest rate, the convenience of servicing one loan, or to secure a fixed interest rate.

Sometimes a company may take advantage of the benefit of refinancing to charge very high fees in the debt consolidation loan. Some unscrupulous companies will purposely wait until an individual has backed themselves into a corner and must refinance in order to consolidate and pay off bills that they are behind on the payments. The individual may lose their house if they do not refinance, therefore they are willing to pay any allowable fee to complete the debt consolidation. This is known as predatory lending. Most debt consolidation transactions do not involve predatory lending.

Another way to start your own debt relief is through credit counseling. Credit counseling offers education to consumers on how to avoid incurring debts that cannot be repaid. Credit counseling generally involves negotiating with creditors to establish a debt management plan, or a DMP, for a consumer. DMP's normally offer reduced fees, interest rates, and payments to the client. A DMP will help the debtor work out a payment plan with the creditor so they may pay off their debt.

There are some criticisms of credit counseling though. Many credit counseling services employ people hired off the street who are trained in credit counseling after being hired. Therefore it is possible that the person helping you may not have any formal training in financial management other than what they learned when they got hired as a credit counselor. The training received as a credit counselor is usually minimal and focused only on the services provided instead of a full course on financial management.

Another criticism of credit counseling is that participating in a Debt Management Plan will ruin a consumer's credit. The participation in such a plan does appear on consumer credit reports, and the client may have more difficulty getting a car or home loan and possibly be denied any further unsecured credit, such as a credit card. Some lenders view a customer's participation in a Debt Management Plan as indicative of the customer being unfit to manage their finances. This is because lenders often take into consideration multiple risk factors to decide if you are worthy of credit. However it is much better to have the fact that you used a DMP rather than going into bankruptcy on your file. Most lenders won't do business with an individual who has bankruptcy on their file, and bankruptcy stays on your file for 10 years. A DMP, however, is considered a minor risk and is more likely to be overlooked by a lender.

Closing Comments

Both debt consolidation and credit counseling are good ways to start on the path to debt relief. You can choose to go with debt consolidation and take out a loan to pay off previous loans. As long as you watch out for predatory lending then debt consolidation is a fine choice. You can also get credit counseling and work with your creditors to reduce your payments and start your own debt management plan. Both plans will help lead you to your debt relief.

Article Source: http://www.rightarticle.com

Learn more about free debt relief and debt consolidation.

Please Rate this Article

5 out of 54 out of 53 out of 52 out of 51 out of 5 

Not yet Rated