Debt can sneak up on even the most frugal individuals. This may happen if you struggle to find a job after college or get forced into early retirement due to age discrimination. Add an emergency to the mix and the situation only grows worse. When looking for solutions to address these situations, debt consolidation, and debt settlement are two of the most common options that surface. At first, they may seem so similar that it’s hard to decide which one is right for you. Let’s explore these two strategies to gain a better understanding of their differences and which might be best for your particular circumstance.
WHAT IS DEBT CONSOLIDATION?
When you consolidate your debt, you take out one new loan that covers your current debt obligations. There are different types of loans for this, which may group like debts together. This is because there are typically different consolidation offers, such as for credit cards or student loans. More often than not, people use consolidation loans to repay credit card debt.
Whatever type of debt it covers, the result is the same. All the loans mesh into one single loan with one monthly payment obligation. This payment is fixed and features fixed interest rates with a pre-established payoff date. Thus, debt consolidation helps to put a foreseeable end to the dangerous cycle of debt. If the debt being consolidated is high-interest, the monthly payment could be reduced as well with a lower interest loan.
WHEN IS CONSOLIDATION THE BETTER OPTION?
The key to successful consolidation is to get ahead of your spending habits long before they get out of hand. If you’ve been missing payments and can no longer keep up with your total balance, it’s probably too late for this option. Here are some of the reasons and instances that make consolidation the better pick:
- You have a good enough credit history to score desirable rates and terms for debt consolidation.
- You can afford the total monthly payment but struggle to keep up with what is due when.
- You want to save money by paying less interest and stretching out the term length of the loan.
- You want to preserve your credit score and history as best as possible to keep the possibility of a mortgage or new car open.
WHAT IS DEBT SETTLEMENT?
For debt settlement, you typically need the services of a third-party company. This company negotiates a settlement with your lenders on your behalf. Typically, when this is done, a consumer can expect a savings of between 40%-60% of the total amount owed. Other terms of your loan agreement may also change to accommodate this. While your credit score can suffer from this method due to late or missed payments, it will begin to improve again once the accounts are resolved in good standing. Also, for most people considering this option, their credit is already damaged and debt consolidation -- while not out of the question -- could be a more expensive option. For people who are way over their heads in debt, paying up to just half of what they owe is well worth it.
WHEN IS SETTLEMENT THE BETTER OPTION?
At this point, debt consolidation may start to look like the better option. This may be true in some cases, but if your debt management has spiraled out of control, it may be too late for that. Here are some of the many reasons people choose debt settlement instead:
- You have accounts that are delinquent and collection agents are already calling.
- You don’t think you can keep up with the total minimum monthly requirements for your debts.
- You are more concerned with lowering your debt obligations than fixing your credit for the present.
- You have no plans to purchase a new home or take out any other large loans in the near future.
WHAT IF I STILL CAN’T DECIDE?
For some people, the choice between debt consolidation and debt settlement is clear. Ultimately, the choice will come down to where you are currently with your debt and what your future goals are. If you have not yet missed payments but can only afford minimum payments on your credit card, you might feel trapped in the middle. You are not alone.
Millions of Americans battle with this question every day. Is it worth continuing to just pay the minimum balances and slip further into debt to preserve a credit score? Or, is it worth letting your credit take a dip for a while to slash your total debt amount and achieve debt relief?
Our certified debt relief experts at Financial Rescue can help you to decide if debt consolidation is right for your financial goals or if settlement better suits your current situation. Get started with a free consultation today.