Before you take on a loan payment method, it is important to compare your options and take the most suitable method.
The key differences
Debt settlements involves negotiating with your lender to settle for a lower interest rate and therefore a much lower debt than you own them. This is commonly used to settle huge debts with one creditor, but it can apply to multiple lenders.
Debt consolidation entails combining all your loans from several creditors into one single loan. You can do this by taking a loan to pay off your depts. And focus your finances on the new loan payment. If you are lucky, you will make fewer credit loans at a shorter time with a lower interest rate. This method is common for people with multiple credits at once; they try to make the payments before the loans reach the overdue dates
The advantages and disadvantages of settlement
Paying your creditors less money than you owe them makes this mode of payment desirable for most people. What you may not know is that dept settlement may have its negatives on your finances.
With dept settlement, you enrol in a debt management programme and work with professionals who help you in managing your financial issues. The professionals work to negotiate your payments with your lender to settle your credits at a lower interest rate. The creditor may accept the deal after which you make the payments in a lump sum amount.
You will face additional fees. During negotiation, most people stop making the loan payments to the lenders. During this time, the interest rates and late fees penalties begin to grow. If the agreement does not go through, you will be left with more debt than you initially had. The time frame for a debt settlement is about one to three years.
Debt settlement can have a negative impact on your credit score and credit reports. When you make the partial settlements, the late and incomplete payment will still appear on your credit history. This can remain on your history for a number of years and will result to low credit points.
The best thing about taking on the debt consolidation plan is the few monthly payments you make. Instead of paying for all your different debt in one month, you make one payment to one loan account each month. This makes budgeting your monthly income easy.
With a high credit score, you will receive consolidation loans at lower interest rates. This means you will pay back less money than you could have when you had multiple debts.
If you have a low credit score, you may not qualify for a debt consolidation loan and if you do, you will make payments with a higher interest rate. The repayment terms on your loan will be completely different and the length of payment may be lengthened.
Debt settlement is a good way to repay your debts if you have financial crises and you cannot afford to make the complete payments. If you can make the payments, go for a debt consolidation loan but ensure you get help from a professional.