Debt consolidation and debt settlement are two financial help options available for those who are struggling with more debt than they can repay. Often, people use these terms in the same way, as if they mean the same thing. In reality, these two solutions are very different options for debt relief.
We’ll look at what each of these options is, along with the pros and cons that come along with them.
A debt consolidation plan combines debts from numerous creditors to instead offer a single loan that pays all of them, typically with lower monthly payments and at a reduced interest rate. Often, this option is best for those who are trying to keep up with bills for multiple payday loans, credit cards, and unsecured debts.
With a debt settlement, you’ll be negotiating with creditors to settle a debt for less than what is owed. This is most often used when there is a single substantial debt with a single creditor, although there may be options with multiple lenders, as well.
Pros and Cons of Debt Settlement
The possibility of paying less than you owe, sometimes far less, makes debt settlement an attractive option when it comes to eliminating debt. However, it’s also a risky option, and many experts in the finance field suggest you only do this as a last resort.
But how does it work?
You, or someone who is negotiating on your behalf, will make an offer to your creditor to settle the debt for less than is owed. If you owe $20,000, as an example, the offer might be to pay a lump-sum payment of $10,000. If the creditor agrees, you make the agreed upon payment, and the matter is settled … at least it should be.
The problem is that if you owe more than one creditor, you will need to go through this process with every single one. So, if you have a couple of credit cards, some bills, and other things – you will have to negotiate with every one of them until you come up with an agreement.
While this is happening, you may be accruing late fees and interest charges on the various debts. This is one of the cons to debt settlement, but it’s far from the only one that you will experience.
- Additional fees. Many debt settlement organizations will encourage you to stop payments while they negotiate. The late fees and interest will be added to the amount you already owe, making the debt even higher.
- Credit score impact. You will experience negative consequences on your credit score by choosing debt settlement. Missing payments can be a negative mark, as can paying the entire amount that you owe.
- Time frame. A debt settlement timeframe is typically fairly long, perhaps two to three years. That means late fees and penalties for these many months will be added to your owed amount.
- Credit report impact. Settling the debt, rather than paying it in full, will be placed on your credit report history for seven years. This can make it tough to get credit from other lenders if needed.
- Company Fees. The debt settlement company will require a fee, this is often a percentage of what is owed, in order to negotiate on your behalf. The fees are on average about 20 to 25% of the final settlement amount which can add up.
- No guarantee. Lenders do not have to accept settlement offers. Some of them refuse to work with debt settlement companies at all.
- Tax issues. There can be tax consequences from choosing a debt settlement. The IRS may count the amount that is forgiven as income, which you will need to list on your taxes.
Pros and Cons of Debt Consolidation
If you have a large number of bills that you need to pay each month, debt consolidation can be an option for relieving that debt. However, it only works if you can cut your spending and be responsible in the future.
This is particularly the case with credit cards and payday loans. If you fall behind on one, it is difficult to get back on track. In the event of a payday loan, this might lead to taking out another, which leads to another until the situation is far more critical than it was to begin with.
With a debt consolidation, you simplify the process of paying your bills. Rather than making multiple payments to various different creditors, you instead make a payment once a month to one person with one deadline to worry about. There are also often cost savings with this option. The one loan you still have will often have a lower interest rate and monthly payment.
However, there are cons as well. The debt is not being reduced or forgiven. That means you will still be paying off the entire amount. For those who choose to continue spending and don’t bump their payment amounts up, it can take a very long time to get out of debt. You should also be aware that with debt consolidation, it often takes two to five years to truly eliminate your debt.
Payday Loan Consolidation
For those who believe the loan consolidation may be an answer to their problems, there are specialty consolidators that work with payday loans. Often, these loans are the hardest to keep track of and pay off in a timely manner, and an organization like RealPDLHelp.com can assist you in breaking free from the cycle of payday loans.
If you think this might be an option for you, you can visit the website and sign up for a free consultation. The professionals at Real PDL Help are always willing to assist you on the way toward a financial future free to debt.