Debt settlement vs. debt consolidation.
If you are struggling with paying your credit card bills or other outstanding loans, two options to consider are debt settlement and/or debt consolidation. We have compared the two options, including the advantages and disadvantages of each. You should understand the pros and cons of consolidating vs settling your debts before you decide which solution is the best solution for you.
Here is a comparison of debt settlement vs debt consolidation
Debt settlement: If you are not in a position to make even reduced monthly payments on your credit card debt or monthly bills then a settlement may benefit you. Settlement will reduce or eliminate the principal balance on your outstanding obligations. It typically can reduce the amount you owe by up to 60%, however the exact mount will vary widely.
This process of debt settlement works wherein a private company or an organization can get your creditors and lenders to reduce your debt by 40-60% of the amount you owe. This is done through negotiation. Then, once you repay that 40-60% of your unpaid balance after the agreement is in place, then you are free and clear and out of debt once and for all. The cons to this option are that your credit scores will be lowered and you may need to close your account.
Pros Of Debt Settlement Include - A tremendous benefit is that a large portion of your debt (up to 60%) is immediately eliminated by your creditors. This will provide you immediate relief in your personal financial situation. It will also make the balance of your monthly debt payments much more manageable.
After the settlement is complete, you can start the process of rebuilding your credit. You will no longer have the stress of trying to juggle the monthly bills, late payment fees, high debt loads, charges, and other factors. Instead, you can focus on managing your credit better and getting your financial situation back under control. Find other ways to improve your credit. Click here on tips for improving credit.
Cons Of Debt Settlement Include - There are definitely some negatives to the debt settlement process. The biggest one is the immediate negative impact on your credit score and overall ratings. This can impact your ability to borrow money in the future, take out home loans, and even maybe impact a job search among other things.
To the credit reporting bureaus, going thru the debt settlement process is viewed much like a home foreclosure; and your credit score may be immediately reduced to 500 or lower. However if you are considering settlement you have probably already missed or will soon miss payments and your score will be lowered regardless. A settlement may in effect just accelerate the reduction in your credit rating as the reduction happens immediately vs. over time.
But this is not always terrible news. While you can improve and rebuild your credit score over time, for the next two years after the settlement is complete you will have to ensure you pay future bills on time, focus on repairing your credit, and you may need to work with sub prime lenders if you need a future loan. So the impact can be reversed over time.
Another con is that you may also have to deal with the income tax implication of a write off. The IRS sees debt settlement like receiving additional income or a cash gift. Depending on your financial situation and where you live, you may need to pay additional state income taxes on the amount that was eliminated.
Debt consolidation: This is probably your best option if you can make reduced monthly payments on your bills. This is when you work with a bank, debt relief company or credit counselor. You can either take out a low interest loan from them, or the company will negotiate with your lenders, creditors or a collection agency so that they reduce the interest rates. Or they may agree to a new, lower monthly minimum payments at which you pay your bills. In addition to a lower interest rate, another pro of debt consolidation and negotiation is that it can help to eliminate or reduce interest charges or late payment fees you have incurred on your accounts.
When the interest rates you need to pay are reduced from the consolidation process, it becomes much easier for you to manage your monthly payments. A lower interest rate will lower the amount of your monthly bills accordingly. In addition, you get the opportunity to consolidate multiple types of bills and debts, such as credit cards, medical bills, and payday loans into a single monthly payment that's much easier to manage.
Pros of Debt Consolidation Include - They are fairly significant. Debt consolidation has benefited millions of people by helping them lower their interest rates and/or reduce fees. The savings passed on to the client can be substantial.
With consolidation, a debt relief organization or credit counselor will negotiate lower interest rates with your creditors. Or they may provide a new loan to the consumer to pay off the old creditors, and the funds will have a lower APR. After this has been done, you just need to make one monthly payment to the company. The payment will be significantly lower than what you were paying in the past. The company will handle paying all your accounts after the negotiation is complete.
Another pro is that the company or counselor will also handle any paperwork hassles, canceling and waive fees, and also oversee the closing accounts that may no longer be required. They handle all this stressful, administrative work, and they oversee all the communication with the creditors and debt collectors. When you select this option, usually you can be out of debt in five years or less. Some credit card companies also have their own consolidation and hardship programs, and you can work directly with them. Read more information on credit card hardship programs.
Cons Of Debt Consolidation Include - A minor negative is that your credit score still may be impacted, but not by as much as other possible solutions. Debt consolidation will have much less of an impact on your credit score when compared to settlement. Most lenders and creditors will also put a temporary hold on extending you more credit or they may suspend your account until they see you are making regular payments. In addition, you need to still monitor your credit card accounts to be sure the debt consolidation company is making on time payments and that the process is working.
The key to deciding upon debt consolidation vs debt settlement
The key factor when deciding whether debt consolidation vs debt settlement will benefit you more is whether you are capable of making any type or amount of monthly payments on your debts at a reduced interest rate. If you just can’t afford to pay anything, and your cash flow is low or falling, then you need to choose the debt settlement option in order to eliminate it. If you can continue to make payments, or maybe just need your interest rate lowered, then your best approach may be consolidation.
Also, while consolidation and the settlement process can both lower and eliminate your outstanding debts, each will impact your credit rating, and the consequences will differ. Settlement will lower your credit rating more than consolidation.
The bottom line is that there is no easy or perfect solution for getting out of debt. When comparing the pros and cons of the two different options here, settlement can absolutely help you see an instant improvement in your financial situation, but at the cost of a more significant negative impact to your credit score. On the other hand, debt consolidation simplifies the process for you and it will also assist you with getting out of debt over a slightly longer period of time, and it has a smaller impact on your credit. However it does take time before you see the benefits of this option.