What Is the Difference Between Debt Consolidation and Debt Settlement?
There are some different ways of dealing with outstanding debts. Two of the main methods you may have heard of are debt consolidation and debt settlement.
They can both be highly effective in putting your finances on a steadier footing, but in what ways do they differ?
You can see below some of the key points that you need to know about to understand them. In this way, you can decide which approach is right for you.
- Combines existing loan figures onto one single, new loan. This can be for the total you already owe, or you may add in new borrowing.
- Converts several monthly repayments into just one payment. This makes it easier to keep track of loan repayments.
- Reduces the number of creditors from several to one.
- Debt consolidation can lower the interest rate paid and may also bring down the total amount due.
- The repayment term may be altered to suit your needs. A longer loan term makes the monthly figure lower but may lead to more being paid back in interest.
- Unsecured loans can be consolidated onto a secured loan basis. This allows for a lower interest rate to be offered by using your assets as security.
In terms of any downsides, spreading your debt over a longer period could lead to more interest being due in total. You may also find it difficult to match existing interest rates on some loans.
Debt Settlement Lowers the Overall Amount Owed
Debt settlement is instead about reducing what you owe. You do this by paying off part of the total. The lender agrees that they will write off the rest.
- It is typically done when you have missed payments. In this case, the creditor could decide to accept your settlement offer rather than risk losing more money in the long term.
- Your lender is under no obligation to accept your proposal. However, they may consider that it is the best option following some negotiations.
- The negotiations with the creditor can be carried out by you or by a credit counselor working on your behalf.
- Only unsecured debts can be paid off in this way. This makes it an option for the likes of credit cards, medical bills, and unsecured personal loans.
- It isn’t right for everyone because it needs you to have a fairly large sum of cash ready. Paying off the agreed debt settlement figure immediately is vital.
One big worry is that it will have a negative effect on your credit score. This is because you're likely to have missed several payments before getting to this stage.
Debt Consolidation Rolls Loans Together
This is a way of bringing together a number of loans, credit cards, or other debt from different sources. It can be extremely useful in simplifying and reducing your monthly commitments or in letting you pay back what you owe in a way that suits you.
Debt consolidation offers a simpler way of getting debts under control. This is an approach that allows you to choose a new lender with an interest rate and payment period that give you the breathing space that you need.
These are both methods that many people use to improve their financial health. If you are struggling to pay back loans or credit cards then it's advisable to look into them and see which one is right for you.