In your search for debt relief options, you may have come across these two confusing debt relief terms and strategies. Debt consolidation and debt settlement are two efficient debt relief strategies that will alleviate your debt burden. They have the following differential elements:
Debt consolidation involves taking up a loan to repay your multiple loans. You will remain with one lender whom you can negotiate payments with.
Debt settlement on the other hand involves an agreement between you and your lender to settle an outstanding debt for less than the amount currently owed.
Do you qualify for debt consolidation? You qualify for debt consolidation if:
- You have multiple high interest rate loans,
- You are unable to make the minimum monthly payments, and if
- You struggle organizing the bills therefore delaying some payments.
Once the validity of these reasons is determined, then you can get debt consolidation.
You qualify for the debt settlement plan if:
- you are behind on most of your payments.
- You have a less than average credit score that will lead to denial of a debt consolidation plan.
- You have some money set aside for settlement of your dues.
Debt consolidation involves grouping your multiple debts and the monthly interests or fees in one place to simplify payments. For example, if you have three credit card loans charged interest at 12%, 16%, and 24%, you may consolidate these loans into one loan with an interest rate of between 10 and 16%. This means that you will pay less monthly. Go through debt consolidation reviews to find the best consolidation firm.
Settlement of your debt is done after it is ascertained that your application for consolidation will not be approved and you are already having trouble repaying your debt. Therefore, the best way out of the nightmare would be making a deal with your creditor or creditors on one repayment or settlement. This can be done in two ways:
Option 1 – The DIY debt settlement
The settlement process will involve your lender settling for an amount lower than what is owed to them. You will have to negotiate with your lender. Since the lender will have noted your repayment problems, they will most likely make the deal that ensures that they recoup as much of their owed funds as possible.
Before the negotiations, you should combine all your money and save up as much as you can to settle the debt. Once you have the resources, talk to your lender, explaining your hardships in a polite, logical, and calm way. The result is unpredictable, but it is worth a try.
Option 2 – The debt settlement company
If the DIY approach fails, then you will have to talk to a credit counselor in a debt settlement company to assist with debt settlement negotiations. They will negotiate a deal or deals with your lender(s) then. Once they agree, you will have to pay the debt settlement company monthly instead of your lender. The monthly payments are put into escrow and after saving up some money, the lender is contacted and paid or they renegotiate.
- Credit Score
Debt consolidation isn’t an option when your credit score is low and debt settlement is an option for your low credit score.
- Types of loans covered
Consolidation works for secured and unsecured loans but settlement only works for unsecured loans. Student loans can’t be settled.
In conclusion, both methods involve getting money to settle debts and in most cases, you will have to file for bankruptcy when both options fail. This will affect your credit score in the same way settlement does or worse. Since both solutions are drastic and will negatively affect your finances, you should consider evaluating your finances. Set up and stick to your budgets. Changing your lifestyle is your first step to managing debt.
Let debt consolidation and settlement be your last reasonable options for investments.