Definition
Debt reduction is the act of lowering the outstanding balance on financial obligations.
Analysis
Debt reduction may be pursued through a variety of methods. A consumer with a budget surplus may simply make payments that substantially exceed the interest and fees incurred during the same period.
Debtors may find that by restructuring their debt that they are able to lower the interest rates and therefore afford to reduce their debt balances over time. A debt consolidation loan may be used by debtors that have a good credit rating to roll multiple high interest rate balances into a single loan with a lower interest rate. A home equity loan or home equity line of credit (HELOC) are both examples of consolidation loans that are secured by equity in the home.
Debtors that have difficulty qualifying for a consolidation loan with reasonable terms may find that they need to meet with a reputable credit counselor. There they can discuss various debt reduction options that can also help restore their credit rating over time. Indeed, a debt management program could possibly help them eliminate their debt through lower interest rates and lower minimum payments.
Debt settlement or bankruptcy are other methods for debt reduction. These come at substantial cost and can have a disasterous impact on credit scores.
