How to Compare Debt Consolidation Vs. Debt Settlement
If you're stuck with overwhelming debt, it may be a good idea to consider a consolidation or settlement process. To decide which one is best for you, start by looking over all of your finances and making a clear budget. Consider whether you want one payment or many, a lower interest rate, or perhaps an extended repayment period. Seek out help from a debt relief company or lawyer if you feel overwhelmed by the process.
Weighing Your Repair Options
Determine if your loan is eligible.Be aware that not all loans are available for consolidation or settlement. Debt settlement, for example, typically focuses on unsecured debts, such as credit card balances. You are generally not able to settle on a car note or home loan. Consolidation is similar, but provides a bit more flexibility in areas of student loans, for example.
- An unsecured debt is one without a connected lien on a piece of property, such as a car or home. The debt is unsecured by a source of collateral. A credit card balance is unsecured, whereas a home loan is backed by a home’s equity.
- Your attempts to consolidate can also face obstacles. The terms of your separate loans may prevent them from being transferred or merged into one. In addition, certain lenders may only offer consolidation for loans above a certain sum.
Look at your current account interest rates.If you are suffering from a particularly high interest rate, it may be a good idea to consider consolidation. Under consolidation you may have a higher overall balance, but you can generally negotiate or find a low interest rate. This will then allow you to pay directly towards the balance, lowering the overall cost of the loan.
- Make sure that you pursue a fixed-rate consolidation loan. A variable rate loan may start out lower, but could increase a great deal over time.
Consider the tax impact.Be aware that any money that you save via a debt settlement could be considered income when you file your taxes. Your creditors will generally report this information to the IRS too. In contrast, debt consolidation agreements will rarely impact your taxes, aside from giving you less interest to deduct at the end of the year.
- If you have any concerns about your tax situation, it is a good idea to speak with a tax advisor or CPA prior to making any debt relief agreements.
Consider the impact to your credit.A consolidation will show a larger amount owed on your creditor report. However, if you keep up with all payments, it will not overly impact your final report. A debt settlement can lower your credit score in the short term, but this can be off-set by the benefits of making consistent new payments or paying off the debt entirely.
Evaluate if you have the funds for a smaller pay-off.Be aware that if you do not pay off a debt settlement in one lump sum, then you may need to agree to monthly payments with fees attached. This can increase the overall amount that you owe. A consolidation agreement, on the other hand, may contain fees at the outset, but generally not for each individual payment.
Experience the benefits of one payment.If you’ve fallen behind in your payments because you simply have too many to keep track of, then consolidation might be a good option for you. Instead of dealing with numerous companies and multiple payment amounts and due dates, one company will own and service your loans. You will have a single payment for a set amount.
- Debt settlement can also help minimize payments, but eliminate them entirely if you agree to pay a lump sum to close out the loan.
Be aware of the collateral requirements.If you are getting a consolidation loan, unless you have perfect credit, you will likely be asked to provide some sort of security. This makes your final loan a “secured loan.” Your collateral can be your car or even your house. However, be aware that your lender can seize these properties if you fail to make your new loan payments as agreed.
- Debt settlement usually does not involve taking out a new loan. This means that your other property is usually safe from seizure.
Beware of the repayment period.In exchange for providing you with a lower interest rate, your consolidation loan may have an extended payment period. This means that you will be paying longer to offset the new larger size of the loan. You may also end up paying more in interest over time, despite the lower rate.
- For a settlement, the repayment term will likely be abbreviated. You might even pay one lump sum and be done with the loan entirely.
Consider the automatic withdrawal of funds.If you are unable to pay the balance in one lump sum, you may need to pay your settlement balance via a monthly withdrawal from a designated account. You will want to make sure that you can manage keeping funds in this account.
Create a comparison chart.It may help to get out a piece of paper, draw a line down the middle, and write consolidation on one side and settlement on the other. Then, write down the pros and cons for each option below the headings. Look over the chart to get a summary of your current situation.
- For example, under a “Consolidation,” you might put, “only one bill to pay.”
Getting Debt Relief Assistance
Decide whether or not to DIY.If you’ve gathered all of your paperwork and think that you can stay on top of the communications with your creditor, then it may be a good idea to pursue everything on your own. However, you may also want to look into working with a debt settlement company. They can negotiate on your behalf for a consolidation loan or a settlement number.
- Some people also choose to work with a debt settlement lawyer. They usually bill by the hour or charge a percentage of the eliminated debt. Make sure that your contract terms are clear before working with a debt lawyer or company.
- No matter the path that you choose, be prepared to be as honest as you can about the hardships that you are facing. Honesty and candor is the best policy. Also, it helps if you can show a history of on-time payments from well before.
Check online reviews for an outside company.If you choose to go with a debt relief company, then do your homework before signing anything. Enter the company’s name into an online search and read all of the available reviews. Look for reviews that span a good amount of time from the past to present. Follow your instincts before reaching out to particular company.
Check for proper licensing.Contact the Attorney General for your state to see if the company in question has the correct licensing to work in debt relief. You can also if they’ve fielded any complaints for the company. Check with the Better Business Bureau (BBB) as well to see if the company has kept in contact with them or used them to arbitrate any complaints.
Be aware of any associated fees.Some settlement or consolidation companies may want a particular payment at the start of the process, or they may require monthly installments of a percentage of the final debt. Ask them to carefully outline any additional fees that could accrue over time. Be aware that, even after all of this work, a creditor is not obligated to accept your offers of a settlement.
- You should also be aware that interest will continue to accrue on your debts as you pursue consolidation or a settlement. If the process takes a while, you may end up paying more for the debt and also paying a debt relief company’s associated fees.
Consider bankruptcy as an option.If you are drowning in debt and feel as if consolidation or settlement won’t work for you, then you may want to consider filing for bankruptcy. This will allow to you erase your present debt, while also allowing you to keep some of your property. However, it will damage your credit in the long and short term.
Assessing Your Financial Situation
Calculate your debt amount.Go through your financial records or pull out a copy of your credit report. Create a list of the loans that you owe, the amount of the loans, and your current interest rates. You will also want to mark down the current noted status of each of your loans. It is especially important to note if any of your accounts have been charged-off or sent to collections.
Determine your current credit score.You can find your score at the end (or sometimes the very beginning) of your credit report. If you plan to pursue some sort of debt plan immediately, then this will be the number that you use to apply for a consolidation. Or, you can delay a bit and try to improve your score even more. However, make sure that your delay is worth it, as you will likely pay more in interest over this time.
- A debt consolidation loan counts as a new line of credit. So, it is possible that you will not be approved if your current credit score is too low.
Find out how much you can pay monthly on your bills.Look over your current budget and determine exactly how much money you can devote to paying down your loans each month. This will require that you accurately estimate those funds going out and those funds coming in. You can then use this monthly payment number as your goal as you weigh various debt relief options.
Determine if you can make a lump payment.If you have a nest egg of funds set aside, then you may want to consider whether or not you’ll need these funds for a safety net, or if you can use them as part of a debt relief process. Specifically, part of the terms of a debt settlement may be that you make a one-time lump sum payment. Knowing if this is an option in advance will save you time in the long run.
- You’ll want to make sure that you still have an emergency fund in place as well. Otherwise, if something unexpected happens, you could find yourself taking out additional debt to compensate for the debt that you just paid off.
- Even as you investigate consolidation or a settlement, make sure to address the underlying financial habits that placed you in this situation in the first place.
- Be very careful signing any contracts or agreements with a debt relief company or lawyer. As well, make sure you understand the terms of any new settlement or consolidation before you agree to it.
Video: DEBT CONSOLIDATION (A Faster Path to Paying Off Debt or to Bankruptcy?)
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