Getting into any form of debt is not a good feeling; however, some debts are necessary. Paying back this debt without adversely affecting your future finances is another hurdle to scale. That is where debt settlement and debt consolidation come in. Both debt settlement and consolidation have a singular aim of reducing your total debt. However, this is the only similarity between the two entities. This article will explain the functions, differences, advantages, and disadvantages of debt consolidation and settlement.
Debt Consolidation: What to know
When you take loans, you may do so from different sources. Paying these loans individually can be a tedious task to perform. To reduce this effect, debt consolidation will group each one of these loans, then take another different loan to pay each creditor all at once. In most cases, you’ll have to approach a financial institution to get a consolidation loan. Depending on your prior relationship with the institution, they may or may not grant you this loan.
Here’s an example below;
Let’s assume you take a loan of two million dollars from ten different organizations equally. To consolidate this debt, you have to first calculate each person’s debt and interest rate together. Let’s also assume that this amounts to a total debt of $2.5 million. You have to approach a financial institution that can lend you that sum of money at a lower interest rate. Once this institution can grant your offer, you pay off the debts to all your creditors. After that, you now pay back the institution based on the agreement.
Debt Settlement: What to know
Another option you can try when in debt is debt settlement. Debt settlement is the process of negotiating the debt you owe to a lower repayment. If you have multiple debts from different sources, debt settlement may not be your best option. But if you took a large debt from a single source, you can try to beg your creditor to accept a lower payment. The person who gave you a loan has the sole decision to accept or reject your offer.
Let’s paint a debt settlement scenario below;
Like the example above; if you owe ten people a total sum of $2.5 million, you have to approach each one of them to reduce the debt. If all of them agree to your proposal, then you have settled debts. But if one of them disagrees, you have to pay exactly what you owe.
Pros of debt consolidation
- Saving money: Although your debt is not forgotten, you may save a fortune when you consolidate your debt. It depends heavily on the financial institution that gives you the consolidation loan.
- Reducing stress: The biggest advantage of debt consolidation is the relief it brings. Owing 2 to 3 debtors at the same time can be a very stressful situation. But the moment you gather the debt into one source, you feel a good relief.
Cons of debt consolidation
- No debt reduction: In debt consolidation, you’re moving from multiple debts to one single debt – No reduction whatsoever. The interest may reduce, but the debt is still there.
- Credit score: You may need a good credit score before you consolidate debt.
Pros of debt settlement
- Reduced debt: Depending on how great you are with negotiations, you can reduce a huge fortune of your debts when you settle.
Cons of debt settlement
- Disagreement: Dependent on the relationship you have with the creditor, he/she has a right to disagree with your offer.