Debt is often overwhelming and it’s one of the most stressful things that someone could deal with. It can leave you feeling powerless and seeking ways to put an end to it, as fast as possible.
As such, debt consolidation and debt settlement are both popular solutions to help when it comes to paying off debt. While some may find debt relief to be the right solution for them, others would find debt consolidation as the light in the darkness.
If you are not sure which one to go forward with, here are some aspects you should consider:
Debt Consolidation: What is it?
Debt consolidation loans provide you with one low-interest loan that you then use to pay off all your existing debts .
For example, if you have multiple acquired debts, typically you pay back each of them individually, which makes it hard to keep track of and manage payments. A debt consolidation loan is used to pay off all your debts, paving the way for you to now pay down one single loan. Moreover, many times credit card debt and other debt types carry high APRs, while a debt consolidation loan will carry a lower APR, thus allowing you to save more money over time.
While this can be advantageous in some scenarios, it can have its pitfalls and develop unhealthy financial habits.
Once they have consolidated and reduced debts, many people may feel overly confident and start overspending. As such, instead of getting back on track with debt consolidation, they make the situation even worse by spending the money they have saved. This can lead to borrowing more money from credit cards, leading to more debt. It can be a vicious cycle and one you should stay far away from.
Debt Settlement: How Does It Work?
Debt settlement, also known as debt forgiveness, is a type of debt relief solution that seeks to fully pay off your debts in one lump sum. This is often negotiated by a professional debt relief company where they will negotiate a sum that the borrower can realistically pay off.
In this scenario, all past debts are forgiven and there are no more monthly debt payments. And while this may sound like an enticing option, it can have extremely negative long-term effects.
First of all, debt settlements will severely reduce your credit score, and will show up on your credit reports for up to seven years. This can prevent you from obtaining a mortgage and purchasing a home. It can also affect your credit cards and the amount of credit your allowed can be severely reduced.
Finally, debt settlement is contingent upon creditors accepting the settlement offer and it may not always work. Creditors could demand a sum that is a bit too high, and in order to pay it, you take a different loan to cover the cost. This irresponsible cycle can continue for years and lead to a worse situation such as bankruptcy.
Debt consolidation and debt relief can both help you manage your debts and provide you with more financial freedom, but they are not without their flaws. Whichever you choose, be sure to choose a reputable service and compare different loan options before making a decision.