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Debt Consolidation Vs Debt Settlement
While handling your personal finances is important, there are many Americans who are carrying far too much debt to pay off on their own. This is something that almost everyone faces at some point throughout their adult lives. If you have amassed a staggering amount of debt that seems to be insurmountable then you may need to consider some alternate options in order to get yourself back into comfortable financial ground.
Traditionally, when people find themselves overwhelmed with debt and no real way to pay it off on their own, they often consider using either debt settlement or debt consolidation. Both of these debt-removing strategies have the sole purpose of getting rid of the debt that you currently owe, though each of them is going about the debt reduction process in an entirely different manner.
Understanding the differences between these two strategies is essential in figuring out the best way to deal with your outstanding debts. With that in mind, this guide is here for you to be able to weigh out the different aspects of each strategy so you can make an informed decision.
Let’s get stuck into debt consolidation vs debt settlement!
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Debt Consolidation Vs Debt Settlement
We look at the major differences as well as the pros and cons of debt consolidation vs debt settlement.
What is Debt Settlement?
The end goal of a debt settlement is to negate the debt that you owe with a lump sum payment and negotiate it down so that the payment is less than what the debt was originally owed. For example, if you have $100,000 of debt and you manage to accumulate $75,000 in a savings account specifically tailored towards that debt then the debt collectors may accept that $75,000 lump sum payment and call it even.
This means that when you start working with a debt settlement company, you’d be able to stop making payments on the unsecured debt that you owe. From there you’d put that money that you would be paying your debt off with and place it in a savings account that is specifically tailored towards paying that lump sum payment.
Once you have accumulated a certain amount of money in that savings account then your debt solution company will contact your debt collectors and negotiate your overall debt cost down to the amount that is saved up so you can pay the lump sum and then be out of debt.
This is a process that can have a huge benefit on your family if you are carrying a mass of debt that at the moment seems insurmountable. There are many debt settlement companies that have managed to help individuals and families get out of debt when they thought they would be buried under maxed-out credit card balances for the rest of their lives. Every situation is going to be different though, so many of these companies offer a free consultation to go over the specific situation that you are in and what the best plan for you will be.
How to Use Debt Settlement
In order to get into a debt settlement, you are going to have to contact a company that offers these types of services. There are many out there that ultimately offer unique features. Just about all of the companies will offer you a free consultation in which you can discuss your current situation. This will allow them to give you structured advice on what some of the best options are for you.
Once you have gone through the consultation period, the debt consolidation company will set you up with the savings plan that you will eventually put towards your debt. This is essentially a forced savings account because they make you pay a monthly premium, but it all goes into your savings account.
Over time, you will notice that you are stacking up a nice amount of savings. When a certain threshold is hit, your debt consolidation company will start negotiating some terms with your lender.
There are certainly some downsides to going into a deal like this, but if it gets you out of debt there are some benefits that may outweigh those downsides. Depending on which debt settlement company you work with, there are likely to be some criteria to hit before being able to work with them. Many of these companies require that you have a minimum level of debt and have had that debt for a certain period of time.
This process varies by company, but many require a minimum debt level of $7,500. In addition to that, you may have to prove that you are behind on your payments. This can be done by showing the outstanding balances as well as analyzing your current monthly cash flow.
Advantages of Debt Settlement
When you start using the debt settlement process, the overall goal is to get yourself out of debt. After all, when you are sitting with a pile of debt, you are likely going to feel a large mass of stress around your financial life. The good news about a debt settlement is that it can get you out of that debt. This will allow you to ultimately shift your focus towards saving and investing your money so that it works for you.
With debt settlement, you will have a specialist working with you who assesses your debt and then works with your creditors to address it. In many ways, this helping hand can relieve your stress and find ways to lower your debt that you hadn’t ever thought of.
Getting back to that clean slate with no debt is an incredible feeling. Sure, you are going to have to deal with some side effects from the debt settlement. Though being able to shift your financial focus to making your money work for you as opposed to against you is going to provide you with some notable benefits.
Once your money starts to grow, you will likely feel very strongly about your financial situation. The debt settlement process can take a while, but the time is going to pass anyway so it is certainly in your favor to use that time accordingly.
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Disadvantages of Debt Settlement
While a debt settlement can pose some benefits for your financial life, there are certain disadvantages that you are going to need to take inventory of. You are going to have to weigh your options to see what is going to be the best route for you. There are many people who have gone into a debt settlement and have come out happy with the results. Though you are going to have to make sure that you understand all of the downsides before you go into this. With that being said, you can take a look below to see some of the most notable disadvantages that a debt settlement can pose.
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There are ultimately no two ways about it, you are going to notice a ding to your credit score when you do a debt settlement. The reason being is that a debt settlement is you admitting that you are incapable of paying off the debt that you took on, meaning that it is going to be harder to get credit companies to trust you in the future.
Interest Does Not Stop
There are some notable downsides to getting a debt settlement. You may feel a short-term relief in knowing that you are able to stop your debt payments in order to build up your savings account to make the lump sum payment. This is a much more viable option than trying to pay both at the same time.
It Might Not Work
There is no debt settlement company that can guarantee that you’ll get your debt settled. When a representative from the debt settlement company reaches out to your credit company, they may not be able to come to an agreement. This would ultimately mean that the debt settlement failed, and you still have to pay whatever it is that you currently owe.
Of course, the debt settlement company is going to charge you a fee when you complete the deal. There is no other way for these companies to stay afloat. This fee can be looked at as either an advantage or disadvantage due to the fact that after the fee you still usually save a lot of money, but this is still something that you are going to have to worry about in the long run.
What is Debt Consolidation?
When using debt consolidations, people take out a loan – commonly called a debt consolidation loan – and then combine all of their outstanding debt balances into that new loan; that is, they pay off their outstanding debts with the new loan, leaving them with only that new loan as their debt. After consolidating their debts, the person in question will only have a single monthly debt payment, usually much lower than it was previously due to the lower interest rate and longer repayment time. The single loan streamlines the person’s debt and makes it easier to manage and pay down.
There are many benefits to debt consolidation. Borrowers who use this process will have a lower interest rate and a single monthly debt payment to contend with, as mentioned earlier. This can give people, especially those who have trouble tracking and paying all their debt balances, some real peace of mind.
The second advantage of debt consolidation loans is that once you pay off all those creditors who have been hounding you, they’re now out of your life. You can relax when the phone rings knowing it’s not a debt collector calling to harass you. Most of the debt consolidation programs will offer a specialized plan that will make it easier to pay off your debt.
Advantages of Debt Consolidation
Unlike debt settlement, you are able to manage your debts on your own. You do not have a mandated saving process that limits your ability to spend money on other things, and the debt consolidation process will not have a significant impact on your credit rating (as long as you pay back your new debt consolidation loan). Moreover, since you’re simply paying back your debts, not relying on your creditors to settle with you, the process will work as long as you continue repaying the debt.
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Disadvantages of Debt Consolidation
Despite the considerable benefits of debt consolidation, however, there are disadvantages to using this debt reduction method as well. If you use your house as collateral for the loan and you don’t make your payments, you could lose it. Second, a consolidation loan generally extends the length of your debt. In other words, instead of paying it off in five years (or less), it could take you seven or even 10 years. This is one-way loan consolidators promise a lower monthly payment, by extending your loan repayment term.
There’s another and even bigger danger of debt consolidation loans and that’s what happens after you get one. You will need to do a much better job of handling your finances than before or you could find yourself back running up new credit card debt – and end up in even worse shape. You will need to create a budget and stick to it and buy only things you can afford. And if you do use a credit card (or several), you will need to make sure that whatever you charge can be paid off when your statement arrives.
Debt Consolidation Vs Debt Settlement: Parting Thoughts
Getting into a situation where your debt has piled up can make your life stressful. This will inevitably leave you fearful about your financial future. Getting too caught up with debt can set you back years if you don’t set up a strategy for getting out of that debt. Thankfully, there are processes like debt settlement and debt consolidation that can help you tackle your credit cards and other debts and set you up for a healthy financial future. Each of these processes has many benefits and drawbacks; at times, neither process will work for people if their financial situations are particularly dire. So, if you don’t think you’ll ever be able to pay down your debts on your own, talk to a trusted financial advisor to see if debt settlement or debt consolidation is a good fit for you.
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