What’s the Difference Between Debt Consolidation and Debt Settlement?
Debt consolidation and debt settlement are both financial components for improving debt load. These components work quite differently and are used to resolve many debt-related issues. Debt consolidation and debt settlement are both forms of debt relief that may help you manage your debt, but they have very different functions. At an initial stage, debt settlement is done to reduce the total amount of debt owed, while debt consolidation is done to reduce the total number of creditors you owe.
What is Debt consolidation?
Debt consolidation is a form of debt relief that combines many debts into one new consolidated debt. Instead of providing money to multiple creditors and looking after multiple monthly payments, debt consolidation allows you to reorganize those debts into one debt.
With debt consolidation your old debts get paid off by the new loan. For example, if you currently own a specific amount on three different credit cards, you could get a personal for that specific amount and then can pay off the balance of those three credit cards with the funds from your new loan. You’ll still owe that amount, but the debt will be all in one place with one monthly payment, and with a lower interest rate. When a debt consolidation loan comes with a lower interest rate, you can pay off the debt sooner and with a lower total cost.
One thing is very important to understand that you still own the same amount of principal balance if you select debt consolidation. Furthermore, if you borrow more money on top of your debt, you might face financial difficulties.
Debt consolidation may offer more visibility and control over your debt. Putting all your debts together could provide you with more determination to pay them off once and for all.
When Debt Consolidation Makes Sense
Debt consolidation may be the right choice in a few different circumstances:
1. You want to simplify your debts.
Instead of paying multiple debts monthly, you can easily combine your debt into one. Consolidation debt can be opted for making numerous monthly payments and help reduce your financial stress.
2. You can get a lower interest rate.
If one opts for debt consolidation, they may find that they get a lower interest rate on the debt consolidated.
3. You are ready to plan to pay off debt.
Debt consolidation help you to get your debt under control or pay off your debt altogether. Taking care of your debt with debt consolidation may reduce your interest rate, help you organize your debt payments, and put you in a better financial position.
Alternatives to Debt Consolidation
A debt counseling service is an alternative to debt consolidation for consumers who are unable to manage their multiple debts. If you are going through financial difficulty, SingleDebt, a debt counselling service, can help you repay your debts by developing a debt plan for you. If you enroll in our program, our team will work with the creditors and attempt to settle down your debts and harassing calls, so that you can live your lifestyle.
What is Debt Settlement?
Debt settlement is another way to relieve your debts. It is completely a different concept from debt consolidation. Unlike debt consolidation, where you pay off your entire balance of your debts, debt settlement works differently and is a form of debt forgiveness in which a creditor accepts to let you pay a lesser amount of what you owe.
Debt settlement is risky to opt for and is generally considered an option of last resort. If you have no ways to payoff your debts, then debt settlement with your creditors is likely to be the right option.
It is very important to be aware of the risks associated with debt settlement. It typically affects your credit score and there is no guarantee that your creditors will agree to settle your debts.
Indeed, it’s important to be aware of the risks. Debt settlement typically involves going delinquent on your bills and then settling with the creditors for a smaller If
Debt settlement is an option that you can manage on your own if you are comfortable talking with your creditors and asking to make a deal on your debts.
When Debt Settlement Makes Sense
Debt settlement can be risky and complex. There’s often a better alternative, but if you feel you’ve exhausted all other options, here’s when debt settlement may be an option:
1. You’re out of options.
If you have exhausted your credit limit and do not have any options left for loans, debt settlement is your only option.
2. You’re willing to take a hit on your credit report.
If your debts have become so unmanageable and stressful that you are willing to risk taking a hit on your credit report due to delinquency, you could pursue debt settlement.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. City Credit Management LLP is not liable for any decision arising out of the use of this information.