5 Useful Debt Reduction Strategies

Many credit counseling agencies offer debt reduction strategies that promise to get you out of the debt you are buried in. Unfortunately, none of these strategies is a quick fix. As a result, most debt reduction strategies should be attempted only if you are facing default or can no longer afford your debt payments and your living expenses.

#1 Prepayment

You always have the option of prepaying on a loan. Even if a lender tells you prepayment is not possible, the lender is actually saying prepayment will come with a financial penalty. Accepting this penalty on something like a car loan or mortgage basically means paying the entire interest on the loan as if you had allowed it to mature instead of prepaying. The main exceptions are loans provided by or guaranteed by the government; most of these loans require no prepayment fees.

#2 Debt Transfer

You may choose to pay off your debt with another loan. For example, you can pay off one credit card with a fast payment from another. If the new credit card has a lower interest rate, you may find your debt can be reduced much faster. This will typically harm your credit score, but you will be able to recover fairly quickly. Debt transfer may also mean taking a new loan to pay off another installment loan, which is often done in settlement and consolidation programs.

#3 Settlement

Settlement is negotiating a lump sum payment with a current lender that is less than the total amount you owe on the loan. The lender may agree to this option because the lump sum is attractive. However, unlike prepayment, you will not be paying any financial penalties. Instead, the lender will use credit penalties to drop your score. This can have an impact on your ability to get loans in the future. You may opt for settlement if you have received a large sum of cash. You may also take a loan to settle another loan.

#4 Consolidation

Consolidating debt is typically one step further than settlement. If you have multiple debts you need to pay off, settling just one will not reduce your total debt. You may consider taking a large loan that pays each of the smaller loans. Typically, the consolidation loan lender will work with you to arrange settlements on all of the existing debt. Your new loan will have only one monthly payment as opposed to many, and you may see a total reduction in principal as well as interest rate. Unfortunately, your credit score will see a penalty.

#5 Bankruptcy

Declaring bankruptcy is frightening for most borrowers. However, if you cannot effectively reduce your debt through other options, it may be a viable choice to help protect you from creditors. Chapter 13 bankruptcy is the first option to consider. In this form, you will have a chance to ask the court to change your payment schedules so you can continue to meet your debts. Chapter 7 is the final option. You will have to liquidate your assets in order to pay off your loans.

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