With so many people over their heads in debt, there are a lot of companies that offer debt consolidation loans. Unfortunately, this method of getting rid of your debt just allows you to take out another loan. While these loans might have lower payments than what you’re paying now, they typically result in you paying more in interest and other fees over the life of the loan they what you would otherwise pay.
Fortunately, there are other ways to consolidate debt. Many people choose to consolidate on their own, for example. To do this, a person will often find a loan on their own. Using a home equity loan or transferring balances on to lower rate credit cards are the most popular ways to do this. While this can alleviate debt problems temporarily, many people discover that they only save a few dollars a month with these loans, and that they are carrying the risk of their interest rates suddenly increasing.
Another way to consolidate debt is to negotiate on your own with individual creditors. Sometimes, banks will agree to lower an interest rate or decrease the required monthly payment on a loan. After getting the bank to agree to a decrease like this, a person has to make sure that they are able to meet their debt obligations, however. Any mistake can cause a bank to demand the note be paid in full immediately.
Strategic default is a way to consolidate debt that carries a lot of risk. Under this method, a person picks one or more debts that they will no longer make payments on. After several months, the creditor is usually willing to negotiate a settlement or at the very least better payoff terms. At this point, the borrower agrees to pay a lump sum of money to pay off the debt. They make sure that this lump sum is significantly less than what they otherwise would have paid. This lump sum is then put onto a credit card or other personal loan. Making the payments on this “new” loan is easier than paying on the old loan, and the borrower gets a couple of months of reprieve from making payments on the loan.
Of course, this method can be very risky. Many lenders will sell the debt to a collection agency who will then add a lot of fees to the debt. Some of these collections agencies will refuse to negotiate. Furthermore, this method can do a lot of damage to a credit score. The missed payments can deduct between ten to fifty points apiece, and having an account sent to collections is not viewed favorably at all. This information can stay on a credit report for up to seven years in some states.
While it is not strictly a form of debt consolidation, debt settlement is a popular option for a lot of people. Through this process, a professional negotiator will review the debts you currently have. From here, this person will work with your creditors to negotiate a reduction in the amount that you owe. Depending on the type of loan, a creditor may reduce the amount you owe by thousands of dollars.
Creditors are willing to work with debt settlement professional because the alternative is for you to default on your loan. Most businesses realize that it is better to accept a partial payment for a loan rather than have the entire balance charged off in a bankruptcy.