Debt Consolidation vs. Debt Settlement-How to Know Which One Will Be Right for You?
Loans are a dime a dozen today, whether you need to buy a house or a car or just need a loan for an unplanned vacation. A loan is automatically placed in our hands when we get a credit card, and end up notching up heavy monthly bills for buying things we didn’t even need in the first place. There are so many banks and other lenders lining up to offer various kinds of loans, and loans are so easy to get that we often get carried away and take too many different loans together.
While these different loans might help us buy so many things or tide over several financial crises, but if allowed to go out of hand, they can be the source of constant worry. Phone calls or follow up visits from multiple lenders, keeping track of different repayment dates and the different interest rates, and also making efforts to improve the interest rates of different loans – these can be a source of great stress. When we spoke to an expert at nationaldebtreliefprograms.com, we were informed that there are two popular and useful ways this logjam can be dealt with – debt consolidation and debt settlement. We were also informed that both these are often interchangeably used, though they mean different things. We took their help to understand what these two means.
Debt Settlement: In a situation where a person has several loans running at the same time, or a single loan which has become unmanageable, a debt settlement is often entered into. It does not involve closure or replacement of the existing loans, but it involves separate discussions and negotiations with the different creditors to work out lump-sum or multiple payments which can be made to clear all or part of the loan. The debt settlement is usually a series of several negotiations between debtor and creditor to see what the minimum amount is that can be considered for the closure of the loan. The good thing about a debt settlement is that if properly negotiated, it could signal the end of that loan, but it might not always be considered a clean repayment during calculation of credit ratings and might impact it negatively.
Debt Consolidation: This is a method of replacing several smaller and concurrently running loans by a single loan from a single lender. The tenure of the loan would be greater than the smaller tenures of each of the current loans, but the possible advantage is a reduction in the rate of interest. Another advantage is that there is only one lender and one loan to handle instead of several. Initially, the credit rating might suffer a little, because one new loan replaces older loans, but as the repayment of this new loan starts to continue, the credit rating would also improve.
Which Is Better: These two types of managing multiple loans are not comparable. A debt settlement is an attempt to clear all existing loans by paying off most of the due amount, whereas a debt consolidation doesn’t kill off all the loans, it only replaces them with a single loan that is slightly easier to manage.