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Choosing the Right Debt Relief Option: Debt Settlement vs Debt Consolidation

 

Debt is undoubtedly one of the biggest financial risks faced by most of the Americans today and is currently escalating at a rapid pace. According to debt.org, there has been a massive rise of 11 percent in the household debts which is an aggregate shared by the Federal Reserve. Acquiring debt other than opting for genuine loans starts with the irresponsible use of various credit cards along with the unforeseen circumstances such as market crash and medical emergencies. When you are dealing with outstanding loans, you are left with two options – to either file for bankruptcy or look out for debt relief options.

Needless to say, bankruptcy can decimate your credit reports for the upcoming years which makes debt relief options the best solution for getting rid of multiple debts. The two main options of debt relief that are prevalent in the modern-day economy consist of debt settlement and debt consolidation. However, there is a lot of discussion regarding which is the best one for consumers and to help you out, here is a guide that will point out all the crucial highlights surrounding both the options.

Debt Settlement: Advantages and Drawbacks

Starting with the pros of debt settlement first, the debt relief utility offers you the prospect of paying less than what you owe currently and in some cases, the negotiation helps in reducing the final settlement to a great extent. Such liberty ensures portraying debt settlement as an interesting choice for going debt free. However, debt settlement is also regarded as a risky choice to make, owing to the misunderstanding and negatives surrounding the debt relief option. As a matter of fact, the prominent financial experts in the industry suggest debt settlement to be used as the ultimate tool when nothing works for you.

How does it Work?

When you decide to avail the option of debt settlement, you or your hired representative that is negotiating for you throw a proposition to your creditor for settling the debt at a lesser amount than what you actually owe. For instance, if you have a debt that estimates around ten thousand dollars, you might offer the creditor with lump sum money of five thousand dollars. The matter gets seemingly settled once the creditor accepts your offer and you make the payment. If you want to be completely debt-free, you will need to repeat the process with each one of your creditors and negotiate with all of them for settling your debts. One of the reasons why debt settlement mostly results as a dicey choice is due to the ongoing addition of the late fees and the building interest rates on your debts.

Working with a Debt Settlement Company

While working with a debt settlement firm to represent your situation, there are some drawbacks you need to know prior to entering in collaboration:

Additional Fees: Debt settlement firms sometimes encourage you to cease from paying monthly debt dues and interact with your creditors while they keep on representing your case and negotiate a settlement.

Time Period: The usual time period of debt settlement circles around two to three years. This means that you will be paying your debt inclusive of the late fees and penalties that have been adding for the last 24-36 months.

Credit Score: One of the biggest flaws of opting for debt settlement is that it has a negative effect on your credit score and report. Ceasing to make monthly payments along with penalties can have a poor show on your credit report that may block you from further financial help.

Even though with so many negatives, debt settlement seems to be the brighter option compared to bankruptcy and can help you in getting a short-term solution to your financial situation. Just make sure that you go through the debt settlement ratings prior to choosing a debt settlement company.

Debt Consolidation: Advantages and Pitfalls

In case you are overwhelmed by the multiple numbers of due payments that you have to deal on a monthly basis, debt consolidation can serve as an effective financial tool only if you are able to make some of the important lifestyle changes. Speaking of the changes in your lifestyle, the biggest consideration you need to make is in your spending habits and must try to curb your expenses as much as possible. This involves ceasing the use of credit cards, which turns out to be the ultimate source of financial issues for most borrowers. When your outstanding balances on the credit cards reaches to the maximum and you are unable to cope up with the higher interest rates and various due payments on different dates, it is the time to opt for a debt consolidation loan if you have a fair credit rating.

The benefits of opting for a debt consolidation loan are very obvious, as it helps in simplifying the procedure of paying your sheer volume of bills. Besides, combining your multiple debts into one saves you from multiple debt payments and provides you with a single payment term at a comparatively lower interest rate. It ensures that you do not miss the payment deadline that is more likely with multiple loans.

The pitfalls of debt consolidation are somehow less negative than that of other debt relief options. When you seek debt consolidation, neither your debt gets reduces nor it is forgiven. You still owe the same amount of loan and if you do not reduce your expenditure or boost your monthly payments, the issue can never be resolved.

Types of Debt Consolidation

If you are determined to seek a debt consolidation loan for combining all your multiple loans, you should be aware of the major types of debt consolidation. Here are the various types of debt consolidation that you can avail to ease your financial situation:

  • Personal loans
  • A line of credit or home equity loan
  • Balance transfer on credit cards
  • Debt management plan

Conclusion

Debt relief options seem to be the perfect solution when you are drowning into debts. Analyze your situation carefully and think which relief tool will serve your needs the best.

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