Debt Consolidation vs. Debt Settlement

Looking to consolidate your debt or settle outstanding debts? Unsure of the solution or strategy you think suits your financial circumstances? Debt solutions and how to resolve your financial issues come in many forms. If you want to compare these two, look no further. In this article, we review financial strategies for improving your debt. We will establish the key differences between debt consolidation and debt settlement. Read below for more information to eliminate debt and possibly reduce the number of creditors you owe.

What is debt consolidation?

This solution is for those with multiple debts and is looking to reduce the number of creditors they owe by combining outstanding debts into a singular repayment plan. This saves you time when paying and reduces the admin involved in making multiple repayments. Additionally, with only one loan to repay, you will find you are paying only one interest rate.

Furthermore, the term lengths of debt consolidation tend to be longer than that of a conventional loan. The result is a much lower interest rate. You will find your monthly repayments much more affordable with lower interest rates. The added benefit of debt consolidation is a reduction in overall fees. Multiple accounts will have varying interest rates, fees, and terms, leading to you paying more overall.

Types of debt consolidation

Debt consolidation loans can come in many forms but will be mainly acquired through a secured or unsecured loan. With a secured loan, lenders will need some form of surety to offer you such a solution. This is in the form of some collateral. Namely, this is an asset such as a home, car, or another valued asset. Your overall credit history and credit rating are considered with an unsecured loan. Those with a respectable credit score will be offered lower interest rates and hence more affordable monthly instalments.

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What is debt settlement?

Debt settlement is ideally paying off debt. Ideally, this is where one pays less of what they originally owed to the creditor. This can be done by reaching an agreement with your lender. The benefit to this is to eliminate debt by paying less than the entire balance of the loan. For those experiencing financial difficulty or bankruptcy, this may be the ideal solution when you urgently need to settle your debts.

Factors to consider

With this financial solution, there are certain factors you will need to consider. Lenders are not obligated to reach such agreements and negotiations with you to settle such debts. They may outright reject such a proposal. However, if they are open to negotiating and getting a deal, they will require a certain agreed amount to be paid in full. If you do not have such funds, the possibility of an alternative solution, such as debt consolidation, will be more appropriate for outstanding debts.

Negotiating your debt settlement

Here is where your bargaining skills will come in handy. When falling behind on your repayments, you may reach out to your creditor and find out if they are willing to negotiate a possible settlement. This can be done over the phone or with a written request.

Your creditor may accept or reject your proposal or propose a counteroffer. When given a counteroffer, you will need to gauge if such a proposal is adequate and within your budget. Remember that you must pay a lump sum in full or over several instalments to settle.

Debt settlement and your credit score

Once settled, you will no longer be repaying the loan. Though consequentially, regarding unsecured loans, this will be in the form of credit cards. Lenders may close your account and no longer grant you credit. Especially those who have faulted on payments prior. Additionally, this will effectively lower your credit score, reducing your chances of potential loans or credit in the future.

Debt consolidation vs debt settlement key differences

How each debts solution works

Debt consolidation aims to reduce the overall number of lenders into a singular repayment plan. With debt settlement, you will negotiate terms in which the debt is settled. Either in total, where one pays less than owed initially as a lump sum or several instalments.

Affect on your credit score.

Debt consolidation may improve an individual’s credit score as you have a reduction in your credit utilization. Those who choose to settle will be those who have failed to make repayments in the past. As with any failed payments, you will be subject to a lower credit score.

Costs

Debt consolidation loans will reduce the number of lenders, in addition, reduce costs. However, lenders may charge a fee for this process to consolidate your debts. When looking to settle, you will be charged by a third party, namely a debt settlement company. They will handle negotiations should you choose not to do so yourself.

Benefits

Should you consolidate your debt, you will possibly save money in interest. Additionally, the added benefit of more manageable and affordable repayment terms. If you choose to settle, you lower the risk of legal action your creditor undertake against you.

Disadvantages

The loan term lengths of debt consolidation are usually longer. The result is you will pay more in interest in the long term. Regarding a settlement, not all credit providers will be open to negotiating. Once settled, your credit score will be negatively impacted.

Debt consolidation vs debt settlement which solution is right for you?

With each financial debt solution, you will need to weigh which solution best fits your financial circumstances. If you fail to honour payments on your debts and creditors propose legal action. In this regard, debt settlement may be an appropriate solution. If you can manage your repayments within the scope of your budget, debt consolidation should be considered.