Debt reduction applies basically to the unsecured debts (like unpaid credit card bills, student loans, personal loans etc).
When the consumer fails to pay the loan installments for a few months because of some financial difficulty, the creditors pile up on him to recover the money which they fear will go into bad debts.
Here one must understand that the reason for non payment by the consumer is his financial trouble.
It is not something that he is doing deliberately.
Therefore, irrational behaviour by the creditors to force money out of the aggrieved consumer will yield no better result than one more declaration of bankruptcy in the economy.
In order to deal with this situation many debt reduction solutions through negotiation and settlement with the creditors are being encouraged which helps the consumer to pay back less.
One among them is the method where the scattered loans are merged and the amount of money finally paid back is far lesser than the actual money owed.
This is known as the 'debt consolidation method'.
Debt consolidation method starts with assessing all the debts owed by the consumer to different companies.
For a small fee the debt consolidation company will take the responsibility of negotiating with the creditors and reduce the debt by a large percentage (sometimes up to 60%).
The negotiated amount is then paid to all the creditors at one go by the consolidation company.
Therefore, the total loan amount reduces drastically for the consumer.
After the assessment and payment to the creditors, the company chalks out a payment plan for the consumer on reasonable terms.
The debt consolidation loan is a secured loan.
So, the interest rate is much lesser compared to the on going market rates.
This means that when debts are consolidated there is a conversion of high interest loans to low interest loans.
This accounts for more debt reduction in favor of the debtors.
The consolidation companies also provide debt management advice to the consumers.
They decide on the time of commencement of installment-wise payment and the number of installments to be paid by the consumers they have provided the consolidation loan to.
If the numbers of installments are more, then the amount paid per month to the consolidation company also becomes much lesser.
The fact that the consumer does not have to pay back immediately gives him enough time to find a source of income that will help him repay the debt.
The increased number of installments will help him in saving some amount of money that will eventually build up his financial base.
It can therefore be seen that merging the loans can actually help a consumer to pay back less.
The catch though is to find a legitimate consolidation company that will merge and reduce the debts effectively.