The financial crisis or the economic downturn of 2008 saw not only the bottom fall out of the real estate market but the high-interest rates also had its impact on the creditworthiness of several other people outside the housing loan / mortgage finance segment. Personal debts also increased multi-fold with people looking at increased payouts primarily from payouts towards credit card outstanding amounts. In addition, rising costs of utilities, retail shopping and medical bills forced many to borrow to pay their bills. The resulting situation was a high degree of unsecured debts which left even many high-earning individuals in dire straits as losses accumulated and assets fell short of their market value.
There are many debt relief options to help deal with unsecured debts; one of them is availing a Debt Solidification Loan. But understanding what a debt Solidification loan provides in terms on debt relief is very important so as to analyze all the options.
A debt Solidification loan is only a part of the debt relief process – other options include Debt Settlement and at the worst level, Bankruptcy.
Let’s take a look at what a debt Solidification loan involves.
Typically, it means combining or putting together all high-interest credit card dues into a much lower interest loan payout. It can also mean ‘Solidification’ of all credit card dues into a more structured and manageable payout schedule to a credit counseling agency, which in turn dispenses payments to individual creditors.
Debt Settlement is another option of debt relief where there is the hope of negotiating outstanding payments with creditors to arrive at a substantially less payout than the actual debt. These debt relief methods are providing alternate means to declaring a person ‘bankrupt’ which has a damaging and devastating impact on personal credit in the long-term.
Hence, debt Solidification represents a wide variety of debt relief options; however, unlike a debt Solidification loan, it involves ‘Solidification of all debts’, including unsecured debts, into an affordable and manageable repayment monthly payout scheme, details of which are advised by a credit counseling agency. This kind of debt Solidification is sometimes referred to as a DMP or a Debt Management Plan.
A Debt Management Plan is seen as a smart move to get out of bad debts; however, going in for a debt Solidification loan requires the person availing the loan to put up some kind of collateral as risk-insurance. This effectively means that in case of default on repayment, the collateral may simply slip out of hand.
A personal loan is just what it means. It is a personal loan taken at a low-interest, long-term schedule to repay old or bad debts, typically credit card outstanding dues. In short, it means paying off ‘old debts with a new loan’. For consumers who cannot be counted to exercise discipline in curbing credit card expenditure, this simply leads to further outstanding and overstretched payments, sometimes defaulting again eventually leading to a worse debt scenario.
Comparison between a personal loan and a debt Solidification loan can provide varying results; what works for one may not work for the other. However, where there is involvement of a credit counseling agency, the debt repayments are consolidated into an affordable repayment plan and a planned schedule is maintained.