Is Debt Consolidation or Debt Settlement Right for Me?
There are benefits and drawbacks to both options.
You’re tired of feeling anxious about your debt. You want to feel financially free again and out from under the burden of high-interest debt. There are multiple debt payoff strategies, but two common options are debt consolidation and debt settlement.
Debt consolidation vs debt settlement is a common comparison. Learn more about each type and determine which is right for you.
Debt Consolidation
When comparing debt consolidation and debt settlement, there are many things to consider. With debt consolidation, multiple debts are combined into a single account. There are many ways to consolidate debt, from personal loans to balance transfer credit cards, and home equity loans to lines of credit.
With a personal loan, if approved, the borrower receives a lump sum that has to be repaid in installments until repaid. The funds are then used to pay off other debt accounts to bring the balance to zero. There is a fixed interest rate, so the borrower pays the same amount each month.
If you own property and have equity in that property, you could take out a home equity loan or line of credit. A line of credit works more like a credit card, whereas a home equity loan is similar to a personal loan. The drawback to using home equity is that your home is used as collateral, and you could lose your property if you default on your loan or line of credit.
A balance transfer credit card could also be used to consolidate debt, but you only have an introductory period of 12 to 18 months to pay off debt before you are charged high interest again. You typically need good credit to qualify, and you may be charged fees.
You may consider debt consolidation if you can secure a lower interest rate that helps you save money and pay off debt faster. Debt consolidation can also help you manage debt more easily by not having to log in to multiple accounts and make payments. It also makes it easier to budget. Debt consolidation is a good option when your debt is a manageable amount.
Debt Settlement
Debt settlement is a very different option than debt consolidation. With debt settlement, a borrower withholds payment from a creditor until the account is in delinquency in order to negotiate a smaller repayment to settle the debt. The goal is to get creditors to agree to a lower payoff amount that you can afford.
Debt settlement will ruin your credit score, making it difficult for you to borrow in the future. You may also be sued for payment. There is also no guarantee that the creditor will agree to settle with you.
You may be able to manage your own debt settlement, or you can hire a company. Be very careful when selecting a debt settlement company because there are many fraudulent businesses promising good results and delivering little benefit. Look up Better Business Bureau ratings and reviews before you choose a company.
Debt settlement is an option when you have overwhelming debt that you can’t foresee paying off, your account is already in delinquency or in collections, and you think your creditor may be open to partial payment to receive some repayment. At this point, you are not risking as much because your credit score has already been damaged by your missed payments.
Summary
Debt consolidation vs debt settlement, which is right for you? Debt consolidation is a better option to pay off debt. If you can secure a lower interest rate, you can pay off debt faster. If you have a longer loan term, you could lower your monthly payments and make them more manageable. You can also reduce the number of accounts you need to manage on a monthly basis. If your debt is already delinquent or in collections, debt settlement is an option to lower your debt. However, there is no guarantee, and you could be sued.
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