Both debt settlement and debt consolidation are offered as a way to relieve debt, but they are quite different from each other. Basically, debt settlement will assist in reducing the total amount of money you owe. Debt consolidation, on the other hand, will reduce the number of lenders you owe. How does each solution work and which one should you use? Let us take a look at each one:
Debt settlement relieves debt by paying off or settling with the creditor an amount that is less than what you originally owed. This means you will be paying less than the total amount due. A professional debt settlement expert will be able to contact them to settle for you.
Some situations call for this type of debt solution more than the others. For example, if the debt has been turned over to a third-party collections agency, then you or the debt settlement services company can negotiate your balance down by a significant percentage. Collections agencies typically buy delinquent accounts for pennies on the dollar. Even if you settle and just pay them half of what you owe, they would have already made a huge profit.
Another way that creditors may agree to settle is when a borrower is on the verge of bankruptcy. This is because lenders know that if you do file for bankruptcy, they will probably not get anything from you. So instead of pressuring you to pay the full balance, they might agree to a settled amount.
For instance, let’s say you have 2 credit cards and owe $5,500 and $3,000 on each. You are unable to meet even just the minimum payment and have already racked up interest and penalty charges. By negotiating through a debt settlement agency, you may settle these debts for as low as $2,200 and $1,200.
Debt consolidation, however, will not let you get rid of your debts right away. What this does is it collects all your debts into one lump sum debt. You will be tasked to take out a new loan to pay off the other loans. The interest of this new loan may be lower than the other monthly payments combined, allowing for some relief in debt.
Although consolidating your debt won’t lower the original amount owed, it might be a good solution if you are having a hard time meeting the minimum monthly payment for all your debts. Some consolidation solutions that you can use are unsecured consolidation loan, credit card balance transfer, federal student loan consolidation loan, peer-to-peer loan, or even a home equity loan or line of credit.
Which one is right for you?
If you choose debt consolidation, all your debts will be added up and you will then have to make a single monthly payment. The agency or financial institution that handles the consolidation will take your payment and divide it among your creditors based on their agreement with the lenders.
The downside to this is you will still be paying all the high interest fees and penalties your debts may have incurred because they were past due. Even though you will be given some time to make the payment, you will be paying the entire debt without credit relief.
In debt settlement, on the other hand, the debt settlement agency will negotiate the payoff amount with each lender. In such negotiations, the focus is usually on the principal. This is the money that you actually owe without penalties and fees. Debt settlement gives you a better chance of removing high interest rates, the compounded interest that has built up over time, and the late fees and over limit charges. Reducing the principal balance through settlement lets you pay less and get out of debt sooner.
To know which debt repayment option is best for you, you need to take a look at the current state of your debt. If your debt-related stress stems from the fact that you have multiple student loans or housing payments, then debt consolidation might be for you. However, if you find yourself really behind on your credit card payments, medical bills or unsecured loans, then you might want to consider getting the advice of a debt settlement services company.
While both debt settlement and debt consolidation can help you gain some relief, neither will get you out of debt completely without some perseverance on your part. Regardless of the solution you choose, you will still need to pay back at least part of your debt because, understandably, creditors will still want to get their money back.
To learn more about debt relief solutions and how to start living with financial freedom, contact CreditAssociates for a free consultation or use our Savings Estimator to see how much you could save.