Difference Between Debt Consolidation and Debt Settlement

Debt Consolidation Debt Settlement

Mounting debts can cause countless woes and sleepless nights. If you are struggling with debt management and need help when it comes to mitigating loans once and for all, this post will help you. It introduces you to two powerful debt relief programs- debt consolidation and debt settlement. Stay tuned to know what both of them are and how they can help you bid adieu to debts forever!

What is Debt consolidation?

Debt consolidation is a scheme where you can merge all your current high-interest unsecure outstanding debts into a single loan. The new debt generally has a much low fixed rate of interest and a single monthly repayment option. This helps you get rid of the headache of having to remember multiple repayment due dates. It enables you to clear your outstanding debts within a short period of time. In the process, you are able to get your finances back in order and improve your credit score.



How to apply for a debt consolidation loan?

Commercial banks, credit unions and reliable finance companies are the organizations which generally deal in debt consolidation loans. You need to approach any one of these third-party institutional financiers and explain your problems to their experts. The specialists will examine the tenure, interest rate and repayment terms of each of your pending unsecure debts. Then, they will offer to issue you a larger loan for a specific period at lower interest rate. 

The money from this fund enables you to clear all your existing debts. However, you need to fill up a lengthy application form and submit copies of whatever documents they ask for. These generally include your income tax returns, property tax receipts, bank statements, salary slips or audited financial statements. Then, you need to provide a suitable collateral as a guarantee for obtaining the loan funds.     

The benefits of opting for a debt consolidation scheme as a means of improving your financial situation are as follows:

  • Converts multiple repayments into a single one,
  • The new secure debt comes with a lower fixed rate of interest,
  • Boost your credit score, and
  • Allows you to become debt-free within a short time.




What is debt settlement?

Debt settlement refers to a debt repayment contract that you enter into with your lenders. Under this legally binding agreement, you pay them a one-time lump sum of money as a full and final settlement for the debt you owe. It is generally equivalent to a significant percentage of existing outstanding debts. In return, they write off the remaining balance of what you owe them as bad debts. 

However, you need to hire a third-party finance company to conduct the complex negotiation process with your lenders on your behalf. This is because you might not have the relevant experience and knowledge to bag the best deals. The enterprise will obviously charge you a fee for the services it provides for the above task. 




How does debt settlement work?

Debt Settlement

Under a debt settlement scheme, you visit the third-party finance company to discuss your condition with its experts. The specialists listen to your case and ask you to make regular deposits to them for the lump sum payment. They then visit your lenders and start negotiating for a suitable repayment plan on your behalf.

 During the discussion, they stress on your intention to pay a full and final settlement amount to clear your outstanding debts. After reaching an agreement with the lenders, they explain the scheme to you. You give your consent to the arrangement by signing the debt repayment contract company with your lenders. The company then pays the lump sum amount to your lenders who declare the remaining portion of debt as a “bad debt”

Benefits

The advantages of entering into a debt settlement arrangement with your lenders for you are as follows:

  • Allows you to clear all of your outstanding debts once and all,
  • Enables you to avoids bankruptcy, and
  • Puts an end to the remainder and collection notices you receive from your lenders.




Differences between debt consolidation and settlement- Snapshot 

Debt consolidation and settlement are both good financial schemes for helping you to become debt-free. However, the plans have the following differences:

Debt settlement Debt Settlement
In this scheme, you combine all your small unsecure outstanding debts into one single loan. You do not clear your outstanding liabilities completely. In this financial plan, you agree to pay your lenders a lump sum of money. This amount is actually less than your outstanding debts to them.
It enhances your credit score. Adversely affects your credit score.
The fixed interest rate varies according to the scheme. You do not pay any interest rate.
You incur no income tax liability as the outstanding debt still exists. You liable to pay income taxes on the amount your lenders write off.

When it comes to choosing between debt consolidation or settlement, you need to seriously consider your needs and specific condition. Both the schemes can help you to become debt-free. Take time to analyze which of the two debt relief programs are ideal for you. Seek professional advice from a skilled expert to make the right choice and become debt-free with success!




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