Consumer credit counseling companies have a variety of programs available to help individuals reduce their financial burden. These services can take the form of a debt settlement, a consolidation of balances or other negotiations between the agency and the lender. All are intended to help lower monthly payments or the total amount due these lenders. How does this affect the remaining loan amount?
Most Loans Are Due In Full
With a typical reorganization of credit card debt, the lenders are contacted by a consumer credit assistance agency that will either pay off the debt or promise to pay it themselves over time. In the latter case the payments may be reduced and the consumer reimburses the agency with the payments and a lower interest rate. The actual principal balance does not change and the entire debt must still be paid in full. However this saves money because a smaller percentage of the payment is swallowed up in finance charges. If there has been a negotiated settlement with a lender that reduces the amount owed, it usually means eliminating most or all of the interest. Again, the principal balance has not changed.
Debts Sent To Collection Agencies
Once a credit card account is delinquent for a period of time the lender will probably send it to a collection agency. In most cases this severs all ties that the original lender had with this account and the consumer will have to deal directly with the collection company. A settlement offer can be made in this case as well, but not all debt relief agencies will work with a collector. Usually the individual will have to do the bargaining in order to pay less than the outstanding balance.
Once An Arrangement Is Agreed Upon
After a review of the financial situation a consumer credit counseling agency will draw up a repayment plan that nearly always includes the total principal amount and a reasonable finance charge. The debt to the credit card companies may be paid in full and the consumer now has a smaller monthly payment each month. Again, this does not reduce the principal owed but merely lowers the overall amount paid over the term of the agreement because of the more favorable interest rate. Not all companies offer the same rates as each will make their own determination of the creditworthiness of the individual consumer. Shopping around to see what can be saved in the long run can be a lengthy process but is worth it to get the best possible deal.
Paying Debt Is The Consumer’s Responsibility
These debt relief programs are not designed to eliminate debt, because someone is always responsible for paying money owed. Rather, a consolidation or settlement is meant to stop further interest charges or reduce monthly payments much like a refinance. This does not mean that an individual cannot bargain with a creditor or collection agency, but to protect his or her credit score full payment is always the best solution.
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