The financial crisis or economic recession of 2008 not only saw the bottom of the housing market fall, but high interest rates also had their impact on the creditworthiness of several other people outside of the mortgage finance/home loan segment. Personal debts also increased several times with people seeking higher payments primarily from payments towards outstanding credit card amounts. Additionally, rising utility costs, retail purchases, and medical bills forced many to borrow to pay their bills. The resulting situation was a high degree of unsecured debt that left even many high-income earners in dire straits as losses mounted and assets fell short of market value.
There are many debt relief options to help deal with unsecured debt; one of them is making use of a Debt Solidification Loan. But understanding what a debt consolidation loan provides in terms of debt relief is very important to weighing all your options.
A debt consolidation loan is only one part of the debt relief process; Other options include debt settlement and, in the worst case, bankruptcy.
Let’s take a look at what a debt consolidation loan entails.
Usually, it means combining or bundling all the high interest credit cards into one much lower interest loan payment. It can also mean ‘Solidification’ of all credit cards due to a more structured and manageable payment schedule to a credit counseling agency, which in turn delivers payments to individual creditors.
Debt settlement is another debt relief option where there is the hope of negotiating outstanding payments with creditors to arrive at a payment substantially less than the actual debt. These debt relief methods provide alternative means of declaring a person “bankruptcy,” which has a damaging and devastating impact on personal credit in the long run.
Therefore, debt consolidation represents a wide variety of debt relief options; however, unlike a debt consolidation loan, it involves the ‘solidification of all debts’, including unsecured debts, into an affordable and manageable monthly payment scheme, the details of which are reported by a credit counseling agency. This type of debt consolidation is sometimes called a DMP or Debt Management Plan.
A Debt Management Plan is seen as a smart move to get out of bad debt; however, applying for a debt consolidation loan requires that the person making use of the loan present some type of collateral such as risk insurance. This effectively means that in the event of a payment default, the collateral can simply spiral out of control.
A personal loan is just what it means. It is a personal loan taken at a low interest, long-term program to pay off old or bad debts, usually unpaid credit cards. In short, it means paying off ‘old debts with a new loan’. For consumers who can’t be counted on to exercise discipline in reducing credit card spending, this simply leads to more missed and overcharged payments, sometimes defaulting again and eventually leading to a worst-case scenario of debt.
The comparison between a personal loan and a debt consolidation loan can give mixed results; what works for one may not work for the other. However, when a credit counseling agency is involved, debt payments are consolidated into an affordable payment plan and a planned schedule is maintained.