Debt Consolidation and Reduction - Is Debt Consolidation and Reduction a Good Idea?

Debt consolidation and reduction involves combining all your existing debts into one and also negotiating a reduced total amount to be paid off. By consolidating debts it is usually easier to manage due to only making one loan repayment rather than several monthly payments.

For instance, you might have a number of debts made up of personal loans, a car loan, credit cards and so on with varying interest rates and different settlement dates. By combining these and negotiating a lower interest rate (usually easier with a secured loan as compared with an unsecured loan) you are left with having to pay off only one debt at a reduced rate which in turn can help to get rid of your debt faster and hopefully provide some level of financial peace and reduce stress in your life.

When it comes to negotiating debt reduction, there are companies that specialize in obtaining agreements with lenders on reduced outstanding amounts resulting in a smaller, total amount due. Also, when the debtor is under financial hardship and would otherwise file for bankruptcy, creditors are more likely to be willing to negotiate as they would otherwise stand to receive nothing.

There are many strategies for reducing debt as well as numerous services that offer debt management programs to suit your needs, from helping people to avoid declaring bankruptcy to simply eliminating debt. These companies will negotiate with creditors and can often eliminate some of the fees that have been charged.

Over the last 20 years people have developed the bad habit of buying things now and paying for them later with the result that credit card debt has risen considerably. Many people find themselves in a situation of not being able to pay off their cards on time and as more interest is added the outstanding balances increase which results in higher repayments in addition to paying a very high amount in interest.

When it comes to debt settlement programs they statistically have a relatively high percentage of people who drop out because consumers with very high financial commitments, often due to overspending, are usually not disciplined enough to stick to a structured payment program over a lengthy time frame.

The key is to visualize the freedom and peace of mind you will gain and to stay focused as well as working on breaking those bad spending habits. After all, bad spending habits is the most common cause behind most people applying for debt consolidation loans in the first place.

Remember that a debt consolidation loan does nothing in itself. It does not reduce debt. You need to be totally committed to and prepared to work hard at eliminating those liabilities. One possible benefit is if you consistently make your payments on the new loan over a year or so, your credit score with the credit agencies should improve because you have effectively paid off your previous accounts and have established yourself as being reliable with your new monthly repayments.

People often make the big mistake of continuing to use their credit cards after consolidating, which can easily defeat the purpose and leave them financially worse off than before.

Its effectiveness depends on at least making the minimum monthly payments and any amount paid above the minimum required helps reduce the loan quicker, so if there are any areas of unnecessary spending that can be cut back on, the money should be channelled towards paying off the loan.

Put in place a household budget and keep track of your spending. Refine it as you go but above all stick to it.

With effective planning and research, accompanied by a lot of determination, it is possible to develop your own personal plan to eliminate debt, thereby avoiding paying debt counselors and consolidation agencies for doing the same work that you can manage yourself.

We will be covering a number of tips and techniques in future articles on this site to help you with evaluating various debt relief options and planning your own strategies in order to hopefully, depending on your personal circumstances, completely get rid of your debts and be able to sleep again at night. This will also include household budget tips and setting specific short term and long term goals to help sort out your financial situation.

For example, you could contact credit card companies as they may be willing to work with you on a credit card debt reduction solution by freezing the account and not charging any interest, then negotiating a payment plan that fits in with your newly developed financial plan.

It is usually best to concentrate on paying off the debt with the highest interest rate first while at the same time paying at least the minimum monthly amount due on any other liabilities.

Having said that, if your debt is out of control and you cannot even pay the minimum payments, or if you are one of the many Americans that prefer to seek qualified guidance in getting out of debt, then debt reduction counseling is probably the best way for you to go.

This can be a wise decision for many, but be aware that many companies offering debt help services charge excessively high fees, so shop around and look for reputable debt consolidation and reduction companies that are accredited or certified by an external organization.

Another option is non-profit consumer credit counseling services offering debt management solutions that will give free advice and work with you to solve your financial problems. You might want to look for services offered through credit unions, universities, military bases and branches of the U.S. Cooperative Extension Service as many so-called "non profit" organizations are not free and may even have hidden fees or they might pressure you to make a voluntary contribution at a time when you can least afford it.

The bottom line is it pays to be armed with knowledge before you decide whether or not debt consolidation and reduction is for you.