Concept of Debt Consolidation vs Debt settlement
Are you are someone who finds the concepts of Debt consolidation and debt settlement somewhat similar or confusing? If so then this article is for you. Let’s get started.
Debt consolidation and debt settlement both are similar in terms of being financial strategies for the improvement of personal debt load. However, they are quite different when it comes to functioning. It should also be kept in mind that they are implemented to resolve completely different issues.
What is Debt Consolidation?
You can use a consolidation loan to effectively consolidate all your debt. It is a single loan that happens to combine and replace all prior debts of yours into one monthly payment with only one interest rate. This service is always offered via financial institutions such as banks or credit unions. After doing this, all of your debt payments will be made to the new lender. The whole concept of debt consolidation is of huge psychological help for many who find having a simplified and singular monthly payment is easier to tackle. In some cases, a consolidation loan can result in a lower total monthly payment or a lower average interest rate on your debt as well. However, extended repayment terms can often happen to offset these savings. Therefore, you must make sure to consider all the long-term costs of consolidation loans.
Also, it should be kept in mind that consolidation loans are mostly secured with one of your assets. It could be anything from your home, car, retirement account, or simply an insurance policy. Therefore, make sure to opt for a secured consolidation loan only if you are comfortable with putting up a considerable amount of collateral.
A bonus tip for you is to be sure to weigh all the pros and cons before undertaking a debt consolidation or a debt settlement strategy. This is because they both can have a lasting impact on your credit score.
What is Debt Settlement?
Debt settlement is a strategy that doesn’t seek to replace existing debt with a new loan, unlike debt consolidation. Instead, this strategy involves a series of negotiations between you or a credit counselor and your creditors. In these negotiations, you would generally want to reach an agreement wherein you will be allowed to pay less than what you owe provided. However, the only catch here is that you would need to pay it in a lump-sum form.
You need to remember that creditors are in no way under any obligation to either enter these negotiations or accept your offer. But, that being said, it is possible for you to pay much less than you owe if the creditor happens to believe that it is the best chance for them to recoup some portion of the loan. Advanced debt-collection techniques and accounts-receivable processes can often be expensive. Also, most lenders don’t want to fight through a bankruptcy proceeding as it is unattractive.
This brings us to the end of our discussion on debt consolidation versus debt settlement. Now, do let us know which strategy according to you, is better than the other.
