If you are stuck in debt trap, there are 2 ways out: Debt consolidation and debt negotiation. When you find you cannot meet your debt burden, you can choose either of these methods to solve your credit problems. Go through the following article to find out which one is right for you.
Debt Consolidation: Here you combine your various high-interest loans into a single low-interest loan. The debt consolidation companies have a tie-up with many credit card and collection companies for predetermined repayment plans. So when you contact them, they offer you a loan with lower rate of interest and thus reduce your total monthly payment. Since this payment is less than your payment to the creditor, you save money.
The advantage of a debt consolidation repayment plan is that it prevents your creditors from harassing you as long as you go on making lower monthly payments. The drawback of the debt consolidation repayment plan is that all your credit cards are cancelled. You have to make the first payment for the program and an extra fee is levied every month. This fee can range from $10-$50 for all your creditors while others charge $5 for every creditor. This will set you back by about $30 each month that you would have otherwise used to repay your debt.
This program is beneficial if you are charged high interest rates or your credit card bills are unmanageable. This is also good if you like making a single payment toward your loan instead of multiple payments to various loans.
Debt Negotiation: Debt negotiation or debt settlement is meant for people whose situation cannot be redeemed by the debt consolidation program. If you are unable to make a minimum payment toward a debt consolidation repayment plan or have failed to make payments for the last 3 months, you can opt for a debt negotiation program.
The advantage of a debt negotiation program is that you need not make any payment to your creditors after enrolling in the program. The debt negotiation company collects the payment from you directly and keeps it in their account or allows you to keep the money in your personal account. The debt negotiation company bargains with your creditors to reduce the total debt by nearly 40-50%. After the deal is struck, the debt negotiation company makes a single payment to them. The drawback of the debt negotiation program is that your credit score goes down while you are enrolled in the program. But since the debt negotiation company asks the creditor to prepare a credit report showing full payment of the debt, it will not affect your score after you have paid your debts.
Some debt negotiation companies offer a credit repair service that erases the negative remarks resulted from the debt negotiation program. This service is charged and you have to pay for it while joining the program.