Posts Tagged ‘Debt consolidation vs debt settlement’

Debt Consolidation Loan Vs Debt Settlement Program – Which Option Is Better?

Don’t panic if you are in knee down in debt and highly stressed out. You need a calm head to work out a solution for your problem. There are several ways to get out of your debt problems, no matter how bad it is. Debt consolidation loan programs and debt settlement programs are the two best options available for you. While the former option allows you to restructure your debt and make the repayment in easy monthly installments (for a longer period of time), the later one allows you to reduce the total outstanding balance but requires you to pay off that reduced amount in one lump sum or in installments (for a shorter period of time) as a final settlement of the debt. People often get confused with these two processes; many think they are the same. But, as you can see now with the brief definition above that they are not the same. In order to decide which one can be a better option for your specific situation, you need to take a lot of factors into your careful consideration. Following is a brief rundown on some of the different aspects associated with the two methods.

How Do The Two Methods Work?

If you cannot solve your debt problems through just credit counseling, you can use a debt consolidation loan program to fix the issues. As part of this process, a counselor negotiates with your creditors and convinces them to make the terms and rates a little more affordable for you so that you can continue making the payments. In most cases, creditors agree to lower interest rates and waive off penalty charges. You pay a single consolidated monthly payment to your consolidation company and the company then disburses the individual payments to respective creditors. It means you no more need to deal with your creditors individually. You stop getting calls from your creditors and debt collectors. Managing your debts and finances becomes easier, as you just have to make a single payment towards your debts every month. You also get valuable advice on your budgeting, which paves the path for you to regain control of your finances. This program can be the best suitable for those people who cannot afford to make a high amount of payments every month. The settlement programs are often available for those who are going through a grave financial crisis and cannot afford to pay even the minimum monthly payments.

A debt settlement program on the other hand reduces the total outstanding debt to a very low amount, usually somewhere around 40-60%. Just like debt consolidation loan programs, settlement plans also waive off penalty charges and reduce interest rates. The only problem here is that you are required to make the reduced debt balance in one lump sum or in very high monthly installments for a short period of time. Those people who live paycheck to paycheck and have hand-to-mouth income may not afford to pay off even the reduced debt balance. If you can, this program might just work for you.

How Does These Options Affect Your Credit Score?

How your credit score can get affected depends on how your creditors report to the credit bureaus about your debt repayment. If they still report your account as delinquent, it will definitely hurt your credit score. Likewise, in case of debt settlement program, if your creditors report to the bureaus that your account is being “paid partially as a settlement program”, it will have negative impact on your report. But, if your creditors report your account as “paid in full”, your score will only improve. That is the reason it is always recommended that when you negotiate any such settlement plan, you must let the creditors include a clause in the agreement that they will report to the credit bureaus as your account was “paid in full”. If they do not agree to any such clause, you will still be able to get rid of your debts but at the cost of a damaged credit score.

In normal circumstances, your credit report remains unaffected if you choose to go for a debt consolidation loan program because these programs do not reduce the principal amount on your debt. But, things can be fine as long as you keep making regular payments. If you make further defaults, it will not only hurt your credit score, but it will also put you into a deeper financial crisis. Therefore, you must choose to go for this option only if you are sure that you will be able to keep up with your monthly payments.

How Long Does Each Process Take?

The length of time taken by these two processes depends on an array of factors. In general, a settlement program usually requires an average duration of one to three years for most of the debts, except credit card debt where the duration can be much shorter (six to nine months). Debt consolidation loan programs on the other hand may take anywhere from thirty-six months to sixty months. The actual period will mainly depend on how much you can afford to pay every month. If you can manage to pay off the reduced balance in just one lump sum, the entire debt settlement process may just take a week or even less. In short, by choosing to make higher monthly payments, you can significantly reduce the duration of the process.

Will You Stop Receiving Collection Calls?

In both cases, you will stop receiving calls from creditors and collection agencies. The company that provides these programs handles all such calls and notices on your behalf. Even if you make a further default, it will be the responsibility of the debt consolidation/settlement company to deal with your creditors explaining the reason behind default.

In order to let these programs work, a written contract is very important both with your creditors and with the company who is providing debt consolidation loan or a settlement service. Overall, now that you have got a clear picture on how both these options work and what their pros and cons are, it is entirely up to you to decide which option can be the best suitable for your situation. If you are still not sure, you should consider getting advice from an expert credit counselor.

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What are the pros and cons of debt consolidation?