Just as there many ways to get into debt, there are multiple ways to climb out of it. Different companies offer their own unique approach, but their goal remains the same; to get you debt free. The two most common types of businesses are debt consolidation and debt reduction companies. Everyone’s case is different, so when it comes to getting debt free they’ll need options to choose from to complete their goal. Both debt consolidation and debt reduction offer their own advantages, so understanding how they can help you become debt free is key when choosing your form of debt help. Below is an explanation of both debt consolidation and debt reduction, and by comparing the two you can make an educated decision on what works best for you.
Debt Consolidation: When you have a high amount of unsecured debt, your interest rates can dominate your payments and make becoming debt free nearly impossible. Debt consolidation services offer the chance to combine all of your debts into one and lock in a low interest rate for the life of your new loan. Depending on your total debt, you may have to put down collateral in order to receive a debt consolidation loan. The collateral is traditionally a second mortgage on your home, but you can also use an expensive vehicle or discuss other options. When you use collateral you reduce the risk to your debt consolidation company, therefore your interest rates are lower, saving you money on your path to a debt free lifestyle. Debt consolidation is often used for credit card debt, for the interest rates can balloon over time and when you lock in a fixed rate you’ll be paying off your balance instead of the interest. You can also use debt consolidation for personal loans and student loans as well, and once you decide which debts you’d like to consolidate you can develop a plan which will help you become debt free over time.
Debt Reduction: If you have bad credit, no collateral or too much debt, than acquiring a debt consolidation loan may be out of the question. Debt reduction offers a chance for you to become debt free if this happens to be your situation. When you seek out a debt reduction company, it is important to remember they aren’t a credit repair company, but simply a company to guide you to becoming debt free. Although your credit score may still be damaged during the debt reduction process, you will still be debt free at the end and drastically improve your debt-to-income status. The length of a debt reduction program depends on your amount of debt, but the typical plan is setup for a 3-4 year period. Although your credit may be affected, the fact you decided to avoid bankruptcy and take responsibility for your debt shows creditors you’ve turned a new leaf. Debt reduction chips away at the mountain of unsecured debt that stands in your way of a debt free future, and once you’ve dwindled it down you’ll understand the benefits of joining a debt reduction program.
