Four Effective Methods for Eliminating Your Debt
Balancing debt is a very difficult process. For many residents, debt can spiral out of control, especially if they are unable to get a handle on their debt within the first couple of months. Unfortunately, many residents in debt ultimately have to take out additional loans to try and pay off their initial debt. This creates a very difficult-to-break cycle, where borrowers keep taking money to pay off their debt, while at the same time incurring more debt from having to borrow in the first place.
This is a self-destructive cycle, and it becomes even worse for borrowers who fell into debt because they did not have a reliable source of income. Fortunately, it is not impossible to eliminate debt. Many borrowers feel like they are powerless when they fall into a debt cycle, but there are a couple of different options that can help eliminate debt.
Debt consolidation is helpful for anyone who feels like they are falling into a debt cycle. Debt consolidation involves taking multiple debts from different sources and combining all of that debt into a single, consolidated plan. At first, this may not seem like that big of an advantage. After all, the borrower is still paying off the same amount of money. However, debt consolidation has a couple of advantages.
The first advantage of debt consolidation is how much easier it is to manage information. Borrowers have all their debt information in one package instead of sorting through multiple documents spread throughout all of their lenders. Since everything is under one plan, borrowers do not have to worry about specific conditions set by individual lenders.
The biggest advantage with debt consolidation comes from interest rates. Breaking the debt cycle is so hard because borrowers struggle to pay off multiple interest rates. In the debt cycle, borrowers have to make difficult decisions regarding which loans they pay off first based on interest rates. Having a consolidated loan simplifies making payments, since borrowers can focus on a single loan instead of trying to calculate interest rates for all the individual loans.
Debt consolidation works best for long-term debt. It is very common for anyone who owes money on multiple credit cards or borrowers who have interest payments that actually exceed their normal bill payments. Borrowers who owe a lot of money may have to offer some form of collateral in order to consolidate their debt, especially if they have a bad credit score.
Debt Management Companies
Another way for borrowers to eliminate debt is to work alongside a debt management company. Borrowers who work with a debt management company are directly represented by someone from the company, who speaks with creditors on behalf of the borrower. Debt management companies assist with consolidating debt, but they also work with lenders to come up with new solutions for previously missed payments. Debt management companies will also renegotiate any existing loans to try and get a better deal for the borrower, such as arguing for a lower interest rate.
In addition to working directly with lenders, debt management teams help borrowers come up with different payment plans. For long term debt, their goal is typically to create a payment plan that can be paid off within three to five years. However, the actual timeframe will ultimately vary depending on how much the borrower owes as well as his or her general financial situation.
Part of what a debt management team does is work with the borrower to decide how much he or she is capable of paying. Through this process, borrowers are not only able to get assistance with paying off their debt, but they can also learn more about setting up a general monthly budget. These services help prevent borrowers from accumulating even more debt.
Negotiating with Lenders
Surprisingly, the majority of lenders are willing to make deals with their borrowers. The reason that lenders are usually willing to make deals is because they do not benefit from their borrowers being unable to pay off their debts. Short-term loans are much harder to negotiate, but lenders are generally flexible when it comes to long-term loans. For example, a lender still benefits if they change the interest rates so a loan is paid off in three years instead of five.
It is much easier for borrowers with good payment history and credit to renegotiate their loans. It is important not to try and push for too much during a negotiation or to constantly try and renegotiate a deal.
In addition to renegotiating interest rates, borrowers may be able to settle their debt entirely. When settling a debt, the borrower offers a one-time payment to remove the rest of the debt. For some lenders, it is more profitable to take a large one-time payment instead of receiving a series of smaller payments over the course of a few years. They are making less money in the long run with these deals, but many lenders prefer having the upfront large payment.
In some situations, borrowers are just unable to pay off their debt, no matter what options they try. In these extreme situations, the only effective way to eliminate debt is to declare bankruptcy. Depending on which type of bankruptcy the borrower declares, he or she either has the debt removed entirely, or all of the payment plans are renegotiated and become court sanctioned. Declaring bankruptcy is a long process with several downsides, including severely affecting borrowers’ credit scores, but for some borrowers, it is the only way to remove their debt.