Most people admittedly get confused with debt consolidation and debt settlement. While the two work to get you out of debt and are often confused with each other, debt settlement and consolidation are quite different processes.
- With debt settlement; you (or a third party company working on your behalf) will negotiate with your creditors to reduce the total balance of what you actually owe. This will be done by convincing them that you are in a financial crisis.
- With debt consolidation, you are essentially just refinancing your debt at a better interest rate. In other words, you are restructuring your debt payments to make it more convenient.
It helps to differentiate them by identifying their respective advantages and disadvantages:
As Far As Actual Savings:
Consolidation does not offer debt reduction but will save the debtor money because of the lowered interest rates. But because balances owed remain the same, it usually does not compare to the savings that settlement can give you. Most debt negotiation services will estimate a 50%-60% savings on your actual balances. In debt consolidation, the reduction will be very low and it will not be on the principal balance of your debt.
As Far As Impact To Your Credit:
Consolidation definitely has less impact on your credit score than settlement. The latter will require you to default on your payments intentionally to convince your creditors that you are in a financial crisis. This will lower your credit score. While that may be an important concern to you, most debt management companies offering settlement will also offer a follow up service that will help you repair your damaged credit. Most of the time, people enrolling in debt settlement generally already have a far from perfect credit score so it should not be a major concern.
As Far As Eligibility:
Debt consolidation loans usually call for a collateral so it is a good option for homeowners. If there is no collateral, a good credit score should suffice in its stead. Any of these requirements will help you get a low interest on your loan.
Debt settlement services, on the other have, typically don’t require any security. However, you need to possess the right type of debts. This debt solution cannot do much for secured debts. But if you have mostly credit card debt, medical bills and other unsecured personal loans, that will make you eligible to go through debt settlement.
Choosing between the two…
Certain debt management companies and organizations will offer both services, negotiating balances down to a minimum then consolidating whatever’s left. Check out your options and have an open mind about your debt solution. Here are some tips to help you make your choice:
- Know your debts. What type do you have? How much do you owe?
- Create a budget to determine how much you can afford to pay your debts on a monthly basis.
- Identify your financial goals. As much as possible, you want to choose a debt solution that will take you closer to your goals after debt freedom.
Whether you’re considering consolidation, settlement, or a combination of both; it’s always a good idea to shop around and see what’s best for your personal circumstances. Compare possible savings and payment terms with as many different places as possible; depending on your debt situation terms and savings can vary quite a bit from place to place.