Debt settlement refers to negotiating with lenders to settle a debt for less than what is owed. Most people use debt settlement to square away a debt with one lender, but it could be used for paying off multiple lenders.
On the other hand, debt consolidation refers to combining multiple different forms of debt from different lenders. Once all debts are combined, they take out one loan to pay it off. This results in one monthly bill, usually lower than what they were paying before.
There is a pretty significant difference between debt consolidation and debt settlement. They are paid off differently and affect your credit differently, but they both aim to make your debt more manageable. Both options, when used correctly, can lead you out of debt.
Pros Of Debt Settlements
The biggest pro of debt settlements is that you will pay less, sometimes by a significant amount, back to your lenders. It works by making a call to your lender, making an offer, and hoping they accept. For example, say you owe a credit card company $5,000. You make the call, and offer to pay $2500 in a lump sum. Your debt with this lender is then resolved.
Cons Of Debt Settlements
Debt settlements are only really a good idea if you only owe one lender. If you owe multiple lenders, you have to go through the same negotiation process multiple times. While in the process of negotiating, you could potentially be racking up on interest charges and late fees. Debt settlements also negatively impact your credit score and report.
Pros Of Debt Consolidation
Debt consolidation cuts down on the number of bills you’re receiving each month. The biggest upside to this is you’re only paying one lender, instead of paying multiple different lenders. Most of the time, the new loan will have a lower interest rate, and the payments will be smaller.
Cons Of Debt Consolidation
When you consolidate your debt, you are not actually reducing how much you owe. You still must make a monthly payment each month, and if you don’t, the problem will continue getting worse. Debt consolidation is only a good idea if you’re sure you’ll make your payments each month.
Stop letting your debt pile up and get a plan in place today. For more information on debt settlement or consolidation, contact Clear Sky Financial for financial help.