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 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.

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 normally involves negotiating with creditors to establish a debt management plan, or a DMP, for a consumer. A DMP helps the debtor work out a payment plan with the creditor so they may pay off their debt. DMP's normally offer reduced fees, interest rates, and payments to the client.

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.

Final Thoughts

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.

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