Looking for debt relief? Two popular ways exist to achieve it – debt consolidation and debt settlement. If you’ve been considering your options you may be wondering which of these is best. There is no easy answer to this because each has its pros and cons.
The two forms of debt consolidation
Debt consolidation can be achieved several different ways. One is to get a debt consolidation loan. If you have a good credit of 661 or above, you could do this with a personal loan. However, if you owe more than $10,000, a home equity loan or homeowner equity line of credit might be your only option.
A second way to consolidate debts is by going to a consumer counseling agency where you would be given a debt management plan (DMP). This will consolidate your unsecured debts because you would then make just one payment a month – to the consumer credit counseling agency.
The pros and cons of debt consolidation
The biggest upside of debt consolidation is that it can be done very quickly. A debt consolidation loan can usually be obtained in just a few weeks. Getting your debts consolidated with a debt management plan shouldn’t take much longer.
If you choose a debt consolidation loan, you should have a much lower payment than the total of the payments you’re currently making on your unsecured debts. This is because you would have a lower interest rate and more time to repay the loan. You would also know exactly when you will be debt-free.
Going to a consumer credit counseling agency should also mean a lower monthly payment than the total of your current payments. This is because your counselor will work with your lenders to get your interest rates reduced and any fees waived.
The biggest negative of both these options is that neither can do anything to reduce your debt. If you owed $20,000 on credit cards before debt consolidation, you would still owe $20,000. If you choose a debt consolidation loan, all you do is move your debt from one set of lenders to a new one. With consumer credit counseling you would still owe the same amount of money to the same lenders but would have better terms.
The pros and cons of debt settlement
The biggest upside of debt settlement is that It’s the only way to get debts reduced. For example, you might be able to settle a $5000 credit card debt for $2500 or less. The way this is done is by offering a one-time, lump sum payment to settle the debt.
DIY debt settlement has one big downside. You must have the cash available to make those lump-sum payments. If you’re typical, it could take you two, three, or even more years to accumulate enough money for those payments. Plus, you would have to be a very good negotiator.
These negatives are why most people choose to hire a debt settlement company. This eliminates both the need to save money for your lump sum payments, and to be a skilled negotiator.
Using a debt settlement company also means debt consolidation.This is because you would transfer a set amount of money each month to an escrow account instead, of paying your lenders.
The biggest downside to using a debt settlement company is the cost. Most charge a percentage of the amount of debt being settled. This typically ranges from 15% to 25%. However, if you owe more than $10,000, you should still save money using a debt settlement company.
When you use a debt settlement company, it generally takes from 24 to 48 months to become debt free. Another important con is what debt settlement will do to your credit. Many experts believe it will drop your credit by at least 80 points. It will also leave a stain on your credit reports for seven years. Lenders will be less likely to grant you credit in the future as they will see you settled your debts instead of repaying them in full.
Debt settlement is s better option than debt consolidation for most people because of its ability to get debt reduced. However, the important thing is to weigh each option’s pros and cons carefully so that you choose the one that makes the most sense given your financial circumstances.