Debt consolidation and debt settlement can be confusing because they are all meant to reprieve consumers struggling with debts. They are viable alternatives that you need to try out before filing for bankruptcy. They can help you get out of a debt situation if followed correctly.
Debt settlement involves negotiating with creditors to allow for the settlement of a debt at a lesser amount in a case of substantial debt. In contrast, debt consolidation rolls high interest-earning debts into a single payment and interest rate. The two methods seek to lessen the struggles of paying debts.
Both debt consolidation and debt settlement may combine debts from several creditors. A lump sum is then paid in debt settlement while it becomes easier for the debtor to focus on making monthly payments at lower interest rates in the consolidation plan. Note that debt consolidation is good in a case where you have debts with different creditors, who charge different interest rates and varying due dates. It makes it difficult for the debtor to pay the debts. Read on to see the difference between them to help you compare the top debt relief companies.
1. The objective
Both debt settlement and debt consolidation aim to give reprieve to the debtor and settle the debt painlessly. The amount to be paid may be lower than the actual amount in the settlement case. At the same time, in consolidation, the debtor will have the interest reduced and the period of payment extended.
To consolidate debts, you may use two approaches that concentrate the debts into one monthly payment bill. You can do this by transferring all the debts into a credit card balance and start paying it in instalments. Alternatively, you may get a bigger loan from an institution and use the proceeds to pay the smaller debts. It leaves you with one debt to pay. Some people choose the home equity loan, while others may consider 401(K) loans. But both home equity and 401(K) options are risky and may impact your retirement or make you lose your home.
2. Reducing debts and debtors
Debt settlement cuts and reduces the total debt by allowing you to pay a fraction of the amount owed in full settlement of the debt. The counselor negotiates with the creditor to allow you to pay a lump sum amount that settles off the debt. It reduces or eliminates the level of debts. On the other hand, consolidation reduces the number of creditors you owe by rolling multiple loans into a new single loan with one monthly interest rate.
3. Providing relief and reprieve
When you consolidate debts, it relieves you from the stress of juggling multiple payments every month. It can also lower interest rates and total monthly payments. Also, you may use an asset as collateral in consolidating a loan. It could also help to improve your credit score.
On the other hand, debt settlement asks the creditor to accept less than what he is owed, so if an agreement is reached, you pay the lesser amount and get some reprieve. You get relieved from the debt, and allow you to start a debt-free life once again. Debt settlement may be difficult to come by since very few creditors will be willing to be paid less. Besides, they may not be under any obligation to negotiate with your counselor. Also, it may require that you make a lump sum payment to settle the negotiated amount.
4.Conditions to meet
Debt settlement requires that you have some bargaining skills to help you negotiate your way out. So, you will need to reach out to your creditors and convince them to negotiate for a settlement. The creditor has the right to accept, decline, or even give a counter offer. A counteroffer may entail increasing the settlement amount you pay. For unsecured debts, the debt may be completely settled, but the account may be closed and could affect your credit score. No debt is wiped out for debt consolidation, and you may need to pay every cent that you owe. However, you are likely to enjoy an extended payment period and reduced interest rates. It helps you simplify paying bills, including having one deadline and a single point of payment.
Both debt consolidation and debt settlement can get you out of debts. However, they both use different approaches. In debt consolidation, the debt is neither forgive nor reduced. Therefore, you must adjust your spending habits for the problem to go away. Furthermore, you don’t need a good credit score for a settlement, you may not get your debt consolidated if your credit score is bad. So, you may need to work on your credit score to consolidate your loans cheaply. The debt is settled once and for all in settlement after making the payment while you may need to spend more years in a debt consolidation program before your clear the debt.