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Debt Consolidation

Debt Consolidation vs Debt Settlement

Many people at some point in their lives will struggle with debt, although this is common it can be easily resolved if handled correctly. When dealing with debt some people will be unsure how to resolve it, in most cases people will need to decide between debt consolidation vs debt settlement (aka credit card settlement).

Debt consolidation is a widely used method of solving debt problems; this process involves combining all of the debts in to one. This can be achieved in two ways; one way is to approach a debt consolidation service. These services state that they will contact your creditors on your behalf and arrange for lower payments and reduced interest on the debt.

Once the consolidation service has agreed a repayment plan with all of your creditors they generally will require you to make a monthly payment to them which they will break down and spread between your creditors, so each creditor will receive a guaranteed amount each month.

This is designed to reduce your total monthly payments so you are able to manage your debts. However debt consolidation services do not always offer their services for free, some will retain a portion of your monthly payments as their fee for the service. There are some that will not charge you a fee; these receive funding from your creditors to ensure they are repaid.

The repayment period will depend on the combined value of your debts; although this period will vary the typical repayment plan is spread over five years. When negotiating your repayment plan you should have a say in how long the repayment period will be.

Another way to consolidate your debts is to use a debt consolidation loan. This loan will be for a sum large enough to repay all of your debts, and have just the one loan to repay. The idea is that the interest rates are much lower and the monthly repayments are also lower than the combined repayments of all your original debts. Due to your financial situation these loans are often are secured on your property which will remain at risk until you have completely repaid the consolidation loan.

Unlike debt consolidation, debt settlements are not achieved by monthly payments over a period of time. The debt settlement process requires negotiation with your creditors to reduce your debt to an amount you can repay in one lump sum. This is beneficial for both parties, for the creditor they get some of their money back quickly instead of waiting years for low repayments.

Some creditors will reduce the debt owed by anything up to 60 percent; this agreement significantly reduces your debt and allows you to more easily make the one off payment to clear the debt. This method of clearing debts is in most cases much more beneficial in the long run, and it can save you a great deal of money and make you debt free.

However the down side of debt settlement is that your credit rating could be seriously damaged and limits your ability to gain any form of credit in the future. Before deciding which path is best for you, it is always advisable to seek advice from an independent financial advisor or a reputable debt settlement company. You should always be aware of the best options available before you make a decision on best to resolve your debt problems. Advisors can help you choose the best option for you between debt consolidation vs debt settlement.

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