How Consumers Become Debt Free
In recent years personal, or individual, debt has been a major problem. It is estimated that the average household in the US is generally $20,000 in non-mortgage debt. Due to such a large amount of debt most people have trouble repaying their debts and need help to do so. Nevertheless, there are a couple of ways to get back on track with one’s life.
An individual may consider debt consolidation. Debt consolidation is when the individual takes out a loan so he or she can pay off previous loans that they have. There are three main reasons why someone would choose debt consolidation. These reasons are so the person can secure a lower interest rate, secure a fixed interest rate, or just for the convenience of servicing a single loan.
Something to watch out for is predatory lending. Predatory lending is when a company takes 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. Most debt consolidation transactions do not involve predatory lending.
There are other ways to work towards debt relief however. Credit counseling is one way to get on the road for success. Credit counseling basically informs consumers about ways to avoid incurring debts that are unable to be repaid. Most people when dealing with credit counseling with start a Debt Management Plan, or a DMP. A DMP will help the debtor by allowing him or her to work out payment plans with their creditor so they can begin paying off their debt. DMP’s generally offer their clients reduced fees, interest rates, and payments.
Unfortunately there are some draw backs to DMP’s and credit counseling. Credit counseling services tend to hire people off the street who have no background in credit counseling until after they get the job. This means that the person who may be helping you only has experience as a credit counselor and no other form of financial management. This is because the training to become a credit counselor is based only on that service and not overall financial management.
Some lenders may see on your file that you once participated in a DMP and it may be considered as a risk. The lender may think that as a customer you are unfit to manage your finances thus making it more difficult to get a loan on a car or home. The reasoning for this is that lenders consider the risk factors of a client before determining whether they are worthy of credit. Luckily having a DMP on your file is considered a minor risk. It is much better to have that on your file than bankruptcy. If a lender see’s that you have bankruptcy on your file it is very likely they won’t deem you as credit worthy.
Overall Review
The way to debt relief isn’t easy but with debt consolidation and credit counseling it can be much easier for you. You can take out a loan to pay off your previous ones through debt consolidation. Make sure you watch out for predatory lending if you choose to consolidate your debt. You can also work with your creditors to reduce your payments and start a Debt Management Plan through credit counseling. Either choice can help you achieve debt relief, but only you can choose which course of action to take.
