When a person is mired in debt, he will generally seek one or more strategies to give himself some financial breathing room. A number of debt solutions are available to individuals, all of which have their advantages and disadvantages. One of the most popular of these is the consolidation of credit, in which the individual trades a number of different debts for a single, larger debt issued by a new creditor.
Debt Consolidation Advantages
Perhaps the main advantage to consolidating a debt is that it greatly simplifies a person's monthly payment schedule. Instead of having to pay multiple creditors each month, the debtor will merely write out one check to the company that has issued it the new loan. In addition, some lenders will be willing to structure this new loan in such a way that the monthly payment size is less than the debtor is currently paying for all his loans combined.
Debt Conslidation Disadvantages
Few companies that issue consolidation loans are nonprofit. In order to earn a profit on consolidation loans, a lender will have to charge the debtor a larger amount of money than it cost the lender to buy up the person's current debts. This means that the debtor may actually be increasing his overall debt load. In addition, some consolidation loans come with large interest rates that may be difficult for the debtor to meet.
Restructuring
In lieu of taking out a consolidation loan, a debtor may be able to manage his debts by simply restructuring his agreements with his current lenders. When a loan agreement is restructured, it means that the lender is changing the repayment terms. For example, a loan may be changed so that a debtor pays a lower rate of interest or is allowed to make smaller-sized payments over a longer period of time, which can make the debt more manageable.
Debt Settlement
A more drastic solution to a person's debt problems may be to attempt to settle with her creditors so that she owes less money on the debt than she originally agreed to pay. While this may save the debtor some money in the short term, this will harm her credit rating and make it difficult for her to receive loans at a low rate of interest. This can complicate her financial future in the long term.
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