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As you’re looking for reliable methods to eliminate your debt, you’ll come across two terms: debt settlement and debt consolidation. How are they different? Which one is right for you?
The answer will differ based no your unique needs, but both exist to provide relief in situations where your debt is simply too much for you to handle alone. Here’s an overview on the difference, and what each entails.
Debt settlement is where a company enters negotiations with the companies you owe money to. In some cases, the savings can be incredible. Let’s assume you owe $4,000 on a credit card. Debt settlement can see you paying this debt off for a one-time lump sum payment of $2,500.
Now, if you have a large enough amount of cash to do this, it can be great. Getting rid of a debt in one large payment, with a balance reduction of 30-50%, is amazing. But there are a few drawbacks to choosing settlement.
The first is that it can take time. Some sources report that finalizing their debt settlement took a few years. During this time, you’re discouraged from making payments, which means your balance climbs in penalties and interest. Which, as we know, is bad for your credit score.
This can be exacerbated by the fact that you won’t be settling all of your debts at once. The company you choose – and you should be very discriminating when choosing – will have to negotiate each debt separately, meaning there could be mixed results overall.
Debt consolidation is an option for people who have a flood of statements coming in, and are looking to seriously reform their spending habits. While there are a few different kinds of debt consolidation, they usually involve rolling all of your debts into one and getting the best loan to pay it all off.
What this means is that from here on out, you are making one payment. The loan has covered your debt, and now you’re paying it back.
Therefore, like debt settlement, this can take a few years to accomplish. The biggest problem is that once you consolidate, you have to avoid creating more debt while you’re paying off your consolidation loan.
Remember that with consolidation, you aren’t paying a reduced amount; you’re just taking care of your debt with one payment at a time. If there’s any reduction in what you end up paying, it should be thanks to the single, agreeable interest rate you have, as opposed to multiple interest rates across your balances.
So, before you sign up for debt consolidation, do a complete breakdown of what you would pay to eliminate your debt as it stands now, interest included. If consolidation somehow ends up costing the same or more, try another company.
Financial experts typically regard debt consolidation as a more practical option, reserving settlement for extreme cases only. And if you choose a reputable company to walk you through it, it can even end up improving your score. Any way you look at it, both are options worth exploring before you consider bankruptcy.