If you are in debt, you may be looking for a quick fix to get you out of it. While that is understandable, you should know the parameters of what you are doing before you take action. Debt consolidation and debt settlement are both great ways to get yourself out of debt, but they both have different consequences.
Keep reading to learn the differences between the two to determine which one is right for you.
Debt Consolidation Explained
Debt consolidation is another loan. You take out this loan to combine all of your other debts into this loan. This way you only have one payment to make each month. That gives you only one interest payment to make and one loan to focus on as you work to get yourself out of debt.
You can typically get a debt consolidation loan from a bank, lender, or credit union. You can find a loan online or at your local bank. It’s a good idea to apply for the loan with a few banks to see what options you have as far as interest rates, terms, and getting yourself out of debt as fast as possible.
What to Watch for With Debt Consolidation
While the promise of one monthly payment can be exciting, there are things you need to watch when you decide to consolidate your debt.
First, what’s the term? Are you extending the term of your current debts? If you take longer to pay the debts off than would it would originally have taken, you end up paying more for the loan. This is because you pay interest for as long as the loan is outstanding. Try to take a term that is close to or less than the existing term on the debt you will consolidate.
You may have to take some type of secured loan to secure your debt. For example, you can take a cash-out refinance and tie the debt in with your home. This means your home is your collateral. If you don’t make your payments, the bank can then take your home. The home equity loan or cash-out refinance aren’t your only options, you may be able to get a loan secured by another personal asset, depending on the bank you choose. No matter the asset, though, you stand to lose it should you not make your payments.
Finally, watch the interest rate. It doesn’t make sense to consolidate low interest debt into a high rate interest loan. Make sure the interest is at least comparable, if not lower. If you can’t find a lower interest rate, it may make more sense to leave the debt as is and continue making payments. You can implement another strategy to get out of debt, such as the snowball method where you focus on one debt and pay as much as you can towards it until it’s paid off. You then move onto another debt, doing the same thing until the snowball effect, pays off all of your debts.
Debt Settlement Explained
Debt settlement isn’t a loan. Instead, it’s an agreement between you and your lender to reduce the amount that you owe or change the terms of the loan in some way. Your creditor doesn’t have to agree to any type of debt settlement, but they often will in an effort to get paid.
If you want a good chance at getting your offer for debt settlement approved, you need to give the lender a good reason to accept it. Creditors don’t want to have to bring in collection agencies or deal with your bankruptcy proceeding, should you have to go that route. They are often willing to negotiate a deal as long as they get paid some of what you owe.
This isn’t a method for anyone that just doesn’t like their debt, though. The creditor will need to determine that you truly cannot pay the debt as it stands. If the creditor thinks the chances of you defaulting are grave, they may be willing to settle on a lump sum payment or make a payment arrangement in order to get paid at least some of the money you owe them.
What to Watch For With Debt Settlement
Debt settlement is tricky business. If you are a strong-willed person that can be convincing you can do it yourself. This is the preferred method so that you don’t have to pay a negotiator to handle it for you. As you negotiate your deals, though, make sure you understand the full terms of what the creditor offers.
For example, if it’s a credit card that you need to negotiate, you should find out if the creditor will close your account after you pay the agreed upon amount. You should also make sure to get any agreements in writing. If you don’t, the creditor could deny that they offered to accept a lesser payment as payment in full. This could leave the debt open on your credit report and delinquent since you did not pay the full amount.
Debt consolidation and debt settlement are two different scenarios. Typically, you use debt settlement when you are in over your head and don’t see a way out. If debt consolidation isn’t an option, debt settlement could be the next best thing to help you get back on track with your finances.