Although debt consolidation and debt settlement are both options for managing debt, they are different processes. Your credit score and the final amount of money needed to resolve debts can vary significantly depending on which debt management route you choose. In order to make educated decisions, you need to understand the distinguishing features of debt consolidation and debt settlement.
Debt Settlement
Debt settlement programs usually involve a third party company. The company negotiates settlements with various creditors to resolve debts for less than the entire amount owed. Settlement agreements typically require one time only payments in full, so debt settlement programs collect monthly payments that are deposited into a saving account similar to escrow.
Like any other business arrangement, there are risks associated with debt settlement. People may have to stop making monthly payments to creditors so they can afford payments towards the settlement program. Late fees and other penalties accumulate on unpaid debts, and creditors aren’t obligated to accept settlement offers. Creditors can even sue while negotiations are in progress. After winning a lawsuit, creditors may garnish wages or take other measures. Your credit score may be severely damaged during negotiations.
Don’t commit to a debt settlement program without evaluating the entire situation honestly. Is the required monthly payment really affordable? Many people have found themselves unable to make all of the required payments, which could end in losing a lot of money without paying off a single debt.
Debt Consolidation
Debt consolidation combines multiple debts to different creditors into one payment. People choose debt consolidation for many reasons. It simplifies multiple monthly bills with a wide range of due dates and payment amounts into a single monthly transaction. Sometimes you can handle debt consolidation yourself, especially if the amount of debt is manageable and you have a good credit history.
People approach debt consolidation in a number of ways. Some transfer all debts to a credit card, although you probably need a credit rating of 690 or higher to be approved. The most beneficial scenario is a new credit card with low or 0% interest during a short promotional period. Make sure you can actually pay off the balance during the low interest period before taking this route so you don’t end up dealing with high interest rates.
Debt consolidation loans with fixed interest rates aren’t as dependent on good credit scores. However, people with poor credit scores may have to accept higher interest rates. Home equity or 401K loans are risky consolidation options. Putting your home at risk may have devastating consequences if you’re unable to make payments at any point during the lifetime of the loan.
Jeopardizing retirement savings harms your future health and well being. Consider all options carefully and consult a reputable financial advisor before choosing a debt consolidation option. Freedom Debt Relief offers a summary of debt consolidation options and their respective advantages and disadvantages.
Which Option is Better?
How do you decide which debt management option is best? Consider how your personal financial situation relates to distinguishing features of debt consolidation and debt settlement. Debt consolidation is a good strategy if your debts amount to less than 40% of gross income, and you have a good credit score to qualify for low-interest credit cards or loans. You also need a reliable income to make consistent payments.
Successful debt consolidation can save money due to reduced interest rates and may help you pay off debt faster than handling creditors separately. Unfortunately, debt consolidation isn’t a solution for unmanageable debt. Debt settlement may be the best option for people with poor credit scores or insurmountable debt they simply can’t afford to pay off.