What is the Difference Between Debt Settlements & Debt Consolidation?

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It is common for everyone to get into debt sometime. Individuals, companies and even countries get into debt every occasionally. To overcome the financial stress and improve your finances however, you need to figure out a way improve you debt load. There are a number of financial strategies that can be implemented to help in improving the personal debt load. Among the most common strategies are the bent settlement and debt consolidation strategies. While the aim is one, there is a clear line of distinction between the two.

Debt consolidation

Debt consolidation, just as the name suggests, is bringing all your debts into one; in basic terms. In the strategy, you consolidate all the loans you have through a consolidation loan. This is just a single loan that replaces and brings together all the prior debts into a single monthly payment and only a single interest rate. Financial institutions such as credit unions and banks offer the consolidation loans and the new debt payments are made to the new lender.

A majority of those who choose debt consolidation opt for it for the psychological benefits it has. It simplifies payment as you only have one lender you have to pay to and the interest rate is minimized to one. Being eligible for debt consolidation is easy and may on some occasions only require consistent monthly payments. You may however need to provide an asset such as a home, insurance policy, car, retirement account or any other property to secure a consolidation loan.

Debt Settlement

Unlike debt consolidation which replaces the existing debt, debt settlement is a strategy in which you (or your credit counselor) and your creditors conduct a series of negotiations in which you agree to make payments which are often in the form of lump-sum payments for an amount of money that is short of that which you currently owe your lender.

Nothing obligates the creditor to accept your offer or enter into negotiations with. Most creditors however see this as the easiest and best way to recoup their loan and will most likely agree to the deal. This is often an advantage to the debtor as they will end up paying a smaller amount of money than the actual debt. It is noteworthy that the process is not often completed in one round and may involve a series of negotiations and communications, which may last for a long time.

One of the disadvantages of this strategy of managing the personal debt loan is that it often gives the lender a bad impression of the debtor. For unsecured debts like credit cards, there is even a chance that your account may be closed down completely as the lender does not feel very confident extending a loan to you again. Another downside of the strategy is that there may be tax consequences on you.

Whichever the strategy you choose to go with, it is prudent to weigh both the advantages and disadvantages, as they are likely to have long lasting effects on your credit score.



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