The world of finance is tricky. It provides you with a lot of benefits when you are in dire need for money but it also brings along a lot of risks along with it. However, if you are prudent enough and follow a strategic plan then you will be able to make the most of the financial strategies and policies that are aimed with intent to provide financial relief to consumers.
- Unfortunately, people often fall behind their repayments simply because they do not follow a plan to manage and use their debt.
- They do not have a proper budget crafted to make arrangements to create a fund to continue making payments every month.
Hence they are unable to reap the benefits of these financial products and end up in debt.
Typically, when people find them in an unmanageable debt condition and struggle to make their payments, they look for different options to come out of debt. Two of the most common options by the consumers are:
- Debt settlement and
- Debt consolidation.
Both of these have its significant benefits and demerits which warrants for your careful consideration to make the right choice. For this you will first need to know the difference between these two most favored options, know about the debt consolidation and debt settlement ratings and much more. Your final choice will primarily depend on your current financial condition and your affordability and eligibility.
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Debt consolidation and debt settlement
Both of these options are financial strategies developed with intent to improve the personal debt load and finance. Both of these function in a quite different manner and are used to resolve diverse issues.
Considering both at the very basic level it can be said that:
- Debt settlement is helpful for reducing the total outstanding amount of debt and
- Debt consolidation is helpful to reduce the total number of loan accounts or the creditors whom you owe money.
Both these strategies may provide you with several other secondary benefits but debt consolidation in particular have a slight edge over debt settlement.
Consolidation loans are usually provided by the financial institutions mainly the traditional banks or credit unions and have its characteristic attributes.
- This is actually another single and larger loan that you take out to consolidate your multiple debts, especially the smaller ones. That means this loan will combine and replace all of the prior debts that you have into one monthly payment that will have one and a lower interest rate.
- The psychological benefits of debt consolidation are that you will have a more simplified and consistent monthly payment. These are good enough reasons to warrant for a debt consolidation strategy as in most of the cases it will eventually result in a much lower total monthly payments and a lower average interest rate on your debt.
- However sometimes and unfortunately, this amount of money saved can be offset due to the extended terms for repayment. Therefore, you are advised to consider the costs of consolidation loans long term before you take it out.
- Lastly, most consolidation loans are secured. That means it will be attached with collateral such as your car or home or even your insurance policy and retirement account. Therefore, make sure that you are comfortable with putting up such a substantial and important asset as collateral before you opt for a consolidation loan.
On the other hand, a debt settlement is a financial strategy that does not replace your existing debts with a new loan.
- A debt settlement strategy involves a series of negotiations between you and your creditors directly or through a credit counselor. This negotiation is done with intent of making a payment much less than the actual amount that you currently owe to your creditors.
- This payment is usually made in a lumpsum and at one time. You may be asked by the debt settlement company to stop making payments to the creditors to create the fund you need to pay the amount negotiated and agreed in a lump sum. However, this will initially hit your credit score but once you make the payment it will score up.
- Ironically, creditors have no legal obligation to enter into such an agreement with you. They may even deny negotiating with you or the credit counselor upfront or accept any offer after negotiation, if it happens.
Nevertheless, through debt settlement you can pay much less than you currently owe only if the creditor believes that you cannot pay them literally and your offer happens to be their best chance to recover at least some amount of the money they lent.
Reasons to go for settlement
Just like you have strong reasons to go for debt settlement, the creditors too have their own reasons to agree to your offer. These are:
- Debt collection, more so the advanced debt collection techniques as well as the accounts receivable processes may seem to be more expensive to them and
- They also feel that it is unattractive, expensive and a loss of time and effort when they have to fight legally through a court proceeding for bankruptcy.
When they choose a debt settlement process, it is usually not completed in one round of communication. They can stretch it out which is their common strategy in order to get a better offer from you.
Any debts settled is usually gone and wiped clean but in case of any unsecured debts such as credit cards there is a risk of it being closed completely after the settlement is complete. This is because the creditors usually will not want to continue granting you credit.
Therefore, debt settlement can be beneficial for both creditors and consumers provided the situations permit. However, to make the best choice you are recommended to contact the Federal Trade Commission or the National Consumer Law Center. You will get a lot of free info regarding these options and even on debt negotiators and debt negotiation.
Since both these strategies will have a lasting impact on your credit score you must weigh the pros and cons of each carefully before undertaking.