Debt Consolidation or Debt Settlement – What Will Work Better for You?

Americans are no stranger to debt. In fact, according to the Federal Reserve, Americans have chalked up a record high of $1.03 trillion in revolving debt in January 2018, mainly comprising credit card debt in 2018, a whopping $830 billion. According to https://www.consumerfinance.gov, 61% of credit cardholders are not in a position to pay their monthly dues in full every month and have no option but to roll it over despite the high APRs prevailing. Given that a monstrous amount of $104 billion was paid in credit card interest and fees in 2018 alone by Americans, it means that many people would be desperate to become debt-free. When credit counseling does not suffice, it is left to consumers to often choose between debt consolidation and debt settlement as a strategy to escape from the clutches of debt. It is, therefore, extremely important for consumers to figure out the difference between the two, and decide which one would be better for them.

Debt Consolidation and Debt Settlement Explained

Even though the terms themselves indicate clearly that they are different from each other, often the way they are projected by financial companies is ambiguous and people tend to get confused. Most of the time the smokescreen is created by the company’s marketing debt relief solutions because they want to represent the processes as being complicated and require professional assistance. However, this is far from the actual truth as both debt consolidation and debt settlement can be done by oneself; though the assistance of a professional, ethical, and competent company always helps. Go through the debt settlement ratings of leading companies if you are considering getting professional assistance.

Debt consolidation is the process of combining multiple debt accounts into one to make monitoring and management simpler. By consolidating individual debts, you do not miss making payments and end up paying penalties and damaging your credit score. The saving in interest can be substantial if you manage to get the debt consolidation loan with which, you pay off the individual debts at a lower rate of interest. The amount of the debt remains the same after consolidation.

Debt settlement is a method of getting creditors to accept less than the full amount of the dues owed because you are not in a position to pay the full amount. The creditors agree to this arrangement because they know that if you file for bankruptcy, they would not get any of their money back since the debts are unsecured.

Debt Consolidation or Debt Settlement – Which Is Right for You?

There are no fixed answers to the question of whether debt consolidation or debt settlement is the better choice as this depends on the financial circumstances of each individual seeking debt relief. Generally speaking, if credit counseling that advises techniques of budgeting and saving has not worked satisfactorily, one should try debt consolidation as individuals with good credit scores are likely to get an opportunity to save significantly on the interest expense and can pay off the loan with affordable installments. It is when the debt is so overwhelming that it is obvious that the individual is in no position to pay the full amount that debt settlement should be considered as a last resort before filing for bankruptcy.

When Should You Consolidate Your Debt?

Debt consolidation is regarded universally as a good step to take for getting control over a large number of individual debt accounts. Typically, those with a large number of debt accounts find them difficult to monitor and manage and as a result, often tend to miss making the monthly payments by the due date. The steep late payment penalties levied as well as penal rates of interest cause the dues to swell and make repayments even more difficult. A debt consolidation loan will usually be significantly cheaper, especially for those with good credit scores, so it is possible to save a lot of money. Debt consolidation using a zero-percent balance transfer offer from a new credit card is even more lucrative since you will not have to spend a single cent as interest during the promotional period that can be as long as 18 months. If you have substantial equity in your mortgage, you can consider a home equity line of credit as the rate of interest is low due to the collateral; however, you can put your home at risk if you default on the loan repayment.

However, debt consolidation may not be feasible if you cannot get a loan on good terms or a balance transfer offer at zero percent because of your poor credit score. Also, if your income is not sufficient to pay the monthly installments on the debt consolidation loan, you will need to consider an alternative like debt settlement.

When Should You Consider Debt Settlement?

Despite the obvious attraction of being able to reduce your debts, debt settlement is regarded as a debt relief tactic to be attempted as a last resort before filing for bankruptcy. You should consider debt settlement when you have so much debt that you can’t even imagine being able to pay them off, you are already a delinquent account in the books of your credit card issuer, and you have some money with which, to buy your creditors off. Debt settlement is not for you if you are broke and have no money to offer to your creditors. Keep in mind that debt settlement will seriously impact your credit score and you will continue to feel its impact for as long as seven years before it gets wiped off your credit report. So, life after settling debt may not be easy as your ability to take on fresh credit will be severely hampered.

Conclusion

While debt is a fact of modern life and when used wisely, it is possible to leverage your income to enjoy your life better. However, you need to be financially prudent and ensure that you do not take on so much debt that you become a slave to it. Get on top of money management right from the start of your career so that you never have to undergo debt relief in any manner.

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Created on May 21st 2019 02:56. Viewed 793 times.

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