Debt Consolidation VS. Settlement Compared
Between debt consolidation vs. debt settlement, which should you choose? If your arrears have become overwhelming, you’ll need a way out. Everyone wants to be financially responsible. A change in circumstances, like losing your job, can quickly plunge you into a financial crisis. What should you do? Settle your debt or consolidate? Find out the pros and cons, so you can make the best decision.
Debt Settlement
Debt settlement is when you negotiate with your creditor to agree to a lump-sum payment that settles your outstanding balances. Typically, you’ll need the assistance of a third-party, known as a settlement company. This company will negotiate on your behalf. Only unsecured arrears, such as credit card balances, is eligible for settlement.
You can engage in debt settlement yourself. Most creditors would rather avoid the cost and effort of sending your account to collections. Although, you must take this step as soon as you see that you can’t make the payments.
Once your accounts have been referred to collections, your only option is to secure the assistance of a debt settlement company. The company contacts your creditors and negotiates a lump-sum payment or a settlement payment plan. While negotiations are underway, you’ll be asked to begin making deposits into a special account, which is used for the lump-sum payment.
Debt Consolidation
Debt consolidation is a type of relief that rolls all your arrears into one payment.
Consolidation is a good strategy if you’re overwhelmed by bills and find yourself falling behind or missing payments. If you’re only able to pay the minimum each month, you’ll never make progress toward getting rid of your arrears.
The most common example is credit card consolidation. With a balance transfer credit card, you can roll all your credit card balances onto one card. Typically, there’s an 0% APR introductory period.
You can also merge your arrears with a fixed-rate consolidation loan from your local bank, credit union, or online lender. Alternatively, you can take out a line of credit or, if you own your home, a home equity loan for consolidation.
A consolidation loan is a good option when you have outstanding balances with high interest and can afford the new monthly payment.
Pros And Cons Of Debt Settlement
When evaluating debt consolidation vs. debt settlement, it helps to consider the pros and cons of each approach.