If you asked most people for a definition of a debt reduction loan they would probably tell you it is a new loan obtained in order to pay off existing debt. They may even add that the purpose of the loan is to reduce interest rates and lower their monthly payment obligations. But are they correct?
In theory yes. A debt loan can help reduce the interest you are paying on your debt, as well as lower your monthly debt payment obligations. But although you may use it to "pay-off" your existing debt, you are not really "paying-off" anything.
You see, replacing your existing debt with new debt is rarely the answer to solving your debt problems. After all, you're not reducing your debt, you are simply switching to a different creditor. But don't get me wrong. Debt loans can be an effective tool to help you eliminate your debt. The key word is tool. And before you can use this tool effectively, you will have to get your financial house in order. Start with a detailed budget that you can stick to. Then do everything you can to free up money that you can use to pay down your debts. Once you have done this, then, and only then, will a new debt loan be an effective tool/weapon in the battle to reduce your debts.
There is one situation in which a debt loan can truly help you reduce your debts, rather than just shift them as we discussed above. And this situation occurs if you can negotiate with your creditor(s) to settle your debts for less than what you owe. Let me explain further.
What if you could get a debt reduction loan for $5,000 and use that money to pay off $20,000 in credit card debt? Sound good? Well it's possible, and here's how it works.
By using a debt relief option called debt settlement (or debt negotiation as it is also known) it is possible to pay off your existing unsecured debts (like credit card debts for example) for as little as 25 cents on the dollar (although 50 cents is more the 'norm'). Of course the catch is that if your credit card debt totals $20,000, you would have to come up with a $5,000 lump sum payment in order to accomplish this. The answer? A debt reduction loan.
Is this debt elimination option right for you? Maybe. But I will warn you it is not quite as straight forward as it sounds. First, debt settlement, although effective as a debt relief strategy is really only suitable for people who are really struggling with their debts and are possibly considering bankruptcy as an alternative. Second, finding someone willing to extend you a debt reduction loan when you are in such deep debt trouble can be a challenge. Many people who take this route turn to friends or family for this type of loan.
As with any other debt elimination technique, it is imperative that
you get to the real root of your debt problems before implementing it.
Ask yourself why you are in debt in the first place? If you got rid of
all your debts today, is it likely that you would be back in debt again
very quickly based on your lack of budgeting skills? Until you have a
solid financial plan in place, and have solved the problems that got
you in trouble in the first place, be very slow to initiate any debt
relief techniques, especially a debt reduction loan.