The Difference Between Debt Settlement and Debt Consolidation

If you have the intention to offset your credit obligation, it's alright to seek the services of a company that will act on your behalf to negotiate new terms. The goal is to have the creditors lower the payoff amount to a figure you that is convenient and affordable for you. The intermediary will agree on new terms that will subject you repaying a manageable monthly payment. After the new terms, you just pay one creditor now instead of multiple monthly payments. However, you have to part with an upfront fee that is paid to the settlement company and later monthly payments follow.

In this article we seek to understand common phrases debt consolidation and debt settlement, how they differ, their pros and cons, as well as which option, sound ideal.

Debt Consolidation

A consolidation loan is loan that seeks to replace your all your existing loans. It seeks to replace your prior debts and unify them into one monthly payment with a one-off interest rate. Almost all financial institutions such as banks and credit unions provide consolidation loans.

On some occasions, a consolidation loan can become more affordable due to shifting from a high interest rate to a lower interest rate on your debt. However, consider the loan term costs of consolidation loans before you initiate the move.

Advantages of Debt Consolidation

Debt consolidation can make your life much easier and less expensive. It makes some sense having to concentrate on a one-off payment program rather than having several. Individuals also benefit from the fact that the consolidation loan might carry a low interest rate that implies you will pay less in the long run. You also stand to improve on your credit score. Although the rates fall at first, they will come back higher than they were before which is a good thing.

Disadvantages of Debt Consolidation

Debt consolidating can be a tempting option for individuals who seek to take up loans. The fact that you'll reduce your monthly payment, you'll be tempted to take on a larger amount. If you refuse to increase your payment and limit your spending, you'll still face a similar problem. Again, debt consolidation loans tend to extend the repayment period which implies that you'll have to pay for a longer period. The interest will also go hand in hand with the monthly payments and in the long run, you'll be forced to part more money than you initially thought.

What is Debt Settlement?

Debt settlement takes a new sense of direction from what we've learned from debt consolidation, which is taking up a loan to replace an initial debt. However, debt settlement is a pact made by the debtor to the creditor to pay less than they owe. However, it should involve a lump sum payment. It is ideal when you owe a large debt to a single creditor, but it could still work with multiple creditors.

You should understand that creditors may turn down the debt settlement offer, and nothing is guaranteed until you initiate the talks and agree on the new deal. Rational creditors accept the offer if they deem it suitable and less troublesome for them. People who have bankruptcy issues could opt for a settlement instead.

Pros of Debt Settlement

Debt settlements may sound unrealistic or too good to be true but once your creditor accepts the settlement you only required to pay a wholesome figure to run scot-free. A figure that is less than you owed.

Disadvantages of Debt Settlement

One deterrent and con about debt settlement is that it messes really bad with your credit score. You could offer up to 150 points deducted and the journey to raise it back to where it was might take a long time. If you apply for future loans, most likely, they'll have high-interest rates tag along.

You'll have to pay the late fees that emanate from delayed payments. Once you think of negotiating new terms, the creditor will factor in the late fees, penalties accrued, as well as the interest rate. Before individuals arrive at the last resort of considering debt settlement, the loan might have stayed for about 2-3 years without being serviced. Some debt settlement firms also charge consultation and negotiation fees.

The Difference Between Debt Settlement and Consolidation of Debt?

Debt consolidation is a little different. It is for negotiating with creditors to cut interest rates, lower monthly lending service fees, and lower overall debt to creditors by lowering interest rates and penalties to zero. You can combine all your high-interest loan obligations into one monthly payment.

Debt settlement is best used when there is no other way to pay off the debt. The reason is that you basically want your borrowers to pay less than they are legally required to pay. This would show on your credit report as your balance has not been paid in full.

Debt consolidation will have a negative impact on your credit score at first, but your credit score will increase after completing the plan. It is also a better option if you are concerned about your credit scores. If you want to get out of debt quickly without worrying about your credit rating, you might want to make a payment immediately, instead of holding off.

However, both can be a good alternative filing for bankruptcy. Do your homework before signing up. Let a qualified advisor advise you on your choice between debt settlement and debt consolidation. With this information, you can determine which adjustment is best for your current financial situation and get the best results in the shortest amount of time. If you are thinking of settling with any one of these options, it shows you are deeply concerned about your financial situation. Analyze your circumstances and try to make a sound financial decision.