Debt consolidation and settlement – Which is better for you?

Debt consolidation and settlement - Which is better for you?

Are you up to your neck in debt?
Well, what if you get a chance to pay off your debts at reduced interest rates? Or you get a chance to reduce your outstanding payable amount to some extent?
Well, you might think this is a pun! But, it’s NOT!
In reality, there are two strategies which might help you to pay off your debts with ease! One is debt consolidation and the other one is debt settlement.
Both methods help you to pay off your debts with ease and eventually, make you free from your debt burden!
You know, we always strive for the best things in our life. And looking for debt relief options is also not an exception!
As a result, you might be wondering which debt relief option is better for you?
So, if you want to dispute about debt settlement and debt consolidation then at first you need to know what they are!

Debt consolidation:

Debt consolidation is one of the most effective ways of debt repayment.
If you are unable to pay off your multiple unsecured debts with high rates of interest, then debt consolidation can be apt for you!
Let’s say, you are trapped with various unsecured debts like payday loans, credit card bills, etc! You might know that in most cases, these unsecured debts come with a high interest rates!
As a result, you are unable to find any way out from your debt burden. So, to pay off your debts easily, you can take the help of debt consolidation. But, how so?
You need to negotiate with your creditor(s) to reduce the high rate of interest on your outstanding balance amount. It helps you to pay off your debt in a much more convenient way within a few years.
Well, let me explain to you with an example.

Loan Details Credit Cards (3) Debt Consolidation Loan
Interest % 28% 12%
Payments $750 $750
Term 28 months 23 months
Bills Paid/Month 3 3
Principal $15,000 ($5,000 * 3) $15,000
Interest $5,441.73($1,813.91*3) $1,820.22($606.74*3)
Total $20,441.73 $16,820.22

Source: https://www.investopedia.com/terms/d/debtconsolidation.asp

As you can see, you can save about $7371.51 in total ($3750 for payments and $3621 as interest).
The biggest advantage is that your credit report gets improved with time!
Yes, you heard it right! Your credit report might get hurt temporarily when you are making those single monthly payments. But after your debts are paid off in full, your creditors update your status in your credit reports as “paid in full”.
As a result, your credit score starts improving within a few months.

Does debt consolidation seem complicated to you?

Wait! If you feel that negotiating with your creditor(s) is becoming hectic, you can enroll with a debt consolidation company. It will try to negotiate with your creditor(s) on your behalf. But remember, their services come along with a professional charge!
However, in debt consolidation program, you can pay off your outstanding balance amount in full but with a reduced interest rate. The biggest advantage is, you can make single monthly payments to pay off your debts.
Wait! What if you are going through a financial crunch! It might happen that you don’t have sufficient funds to pay off your debts by debt consolidation!
Then, what is going to happen if you fail to repay your outstanding balance amount?

“Collection calls”

This is the most incessant thing you can go through when you fail to pay off your outstanding balance amount!
Your creditors will make these collection calls during the first 180 days of continued non-repayment. After this, your creditors “write-off” your debts and sell it off to a collection agency.
If you have faced this situation, we know that you have been trying hard to get out of this situation. But it’s possible through some strategic debt relief options only. And debt settlement is one of them.
In debt settlement, you have to negotiate with your creditors to reduce your outstanding payable amount.
But your credit report gets hampered for almost 7 years! Because after your debt gets paid off, your creditors update your credit report as “paid as settled”. Though it is slightly better than “unpaid” status, it still affects your credit report badly!

Sometimes, your creditors or collection agencies might not agree with you to reduce the outstanding payable amount. In that case, you have to wait till the time they agree with you. Or you can opt for any debt settlement company.
They will try to negotiate with your creditors to reduce your outstanding balance amount. Besides, the settlement company will assess your financial situation. Based on that, they will try to settle an amount of your outstanding balance which you can afford to pay.
After that, you have to make agreed upon single monthly payments to the settlement company, which is deposited in a trust account.
The company, in turn, will pay a lump sum amount to your creditors to settle your debts.
And guess what? Once you start making payments, you will get rid of those incessant collection calls!

Let’s wrap-up!

After going through so many things you might be a little bit confused! But don’t worry, we will help you to assimilate the concepts regarding debt consolidation and debt settlement.
So, let’s summarize by understanding the key differences between the two major debt relief strategies.

Debt consolidation Debt settlement
With slashed rates of interest of several loans, single monthly payments are being made to pay off debts. Your outstanding balance is reduced to pay off debts.
Credit report gets improved with time as you pay off the balance in full. Somehow, the credit report is negatively affected.
Generally opted when a person can pay off the outstanding balance, but with reduced interest rates. It is opted when a person is debt trapped badly and not been able to pay off outstanding balances in full.
Single monthly payments are made to pay off debts. Single monthly payments are made to the settlement company (if paying through a settlement program), which in turn pays a lump sum amount to the creditors.

So, which debt relief option will you choose?