Debt Reduction Consolidation

Many people looking to become debt free look towards debt reduction consolidation as the solution.

Debt reduction consolidation is not a quick fix, even though debt reduction companies often present it as such. If handled correctly, however, it is a very effective way of paying down your debt - assuming that you change your spending habits to avoid increasing your debt levels again.

Debt reduction consolidation is a debt management plan and there are basically two models for it - with many variations in between.

Debt Reduction - Model 1

One model is where you take out a loan and use it to pay off your debts. This loan then becomes your one and only debt payment which you pay down each month until it is paid for. The advantage of this is that you are able to get out from under your credit card debt bills and other debts all at once. Also, the loan is usually structured in such a way that you can more easily pay off your main debt.

The drawback to this type of debt management plan is that having paid off your credit cards, you now think that all of that credit is freely available to you again, even though in reality, you have simply transferred the debt to a new loan.

Although is most cases you will need a secured  loan (such as a home equity loan), if you have good credit, you may be able to get an unsecured loan. If so, this is the better route to take as you will not be placing ownership of your home into jeopardy.

Debt Reduction - Model 2

The second model for debt reduction consolidation is where you, or the company you are working with, come up with a plan to pay down your debt in a certain amount of years. This method requires no loan on your part. It requires budgeting and possibly negotiation with your creditors to modify their payment terms to where you can afford it.

If going through a company, you will make one payment per month. They will use your one payment and distribute it among the creditors plus taking out their fee.

The advantages of this method are threefold. One, it forces you to actually come up with a plan that focuses on paying attention to your monthly cash flow and staying within your means. Two, it doesn't require you to take out a new loan, which may make your payments easier, but doesn't really reduce your debt. And, three, as a side effect, it teaches you how to handle money.

Either one of these debt reduction consolidation plans is something you can implement on your own or you can hire a debt reduction consolidation company to handle it for you.

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