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Debt Consolidation vs. Debt Settlement Agreement

Debt Consolidation vs. a Debt Settlement Agreement: Which is Best for You?

With all of the information out there today, it can be difficult to decide which debt relief option is best for you. Whether you have multiple maxed out credit cards, huge car payments, or large amounts of unexpected medical debt, there are options available to help you gain control of your finances. Knowing all of your options and what will be best for your situation is key to coming up with a realistic and actionable plan to becoming debt free.

There are many different aspects you need to know when considering debt consolidation or a debt settlement agreement. Both are tools that can be used to experience debt relief and ultimately regain control of your finances.

What is a Debt Settlement Agreement?

This solution is an agreement that is made between you and your lender that allows you to pay back a partial amount of your full outstanding debt and settle your account. Depending on the amount of debt that you have, the process can take a few month or even years. Additionally, not all lenders are as willing to negotiate an agreement, so this option is not always available.

Debt settlement agreements can also have a potentially negative impact on your credit score. If you are not making consistent payments during negotiations with your lender, or if you are not working with a debt relief organization to save money and offer your lender a large payment all at once, then your credit score will definitely be impacted. These are all factors that need to be considered when deciding if this is the right option for you.

What is Debt Consolidation?

Debt consolidation is the merging of all of your outstanding unsecured debt, into one single payment. Unsecured debt is money owed with nothing being held as collateral. With this approach, you are also able to get a lower interest rate, which means you will pay less in interest over the lifetime of the loan.

With this option, your debt should become easier for you to manage, though it is not immediately paid off. If, however, you can consistently make all of your payments, this option can also help to improve your credit score.

Differences between a Debt Settlement Agreement and a Debt Consolidation Loan

The main difference between these two debt relief options is that the former allows you to negotiate and only be responsible for paying a portion of what you owe instead of paying the full amount. With the latter, the amount of debt that you owe is not reduced through negotiations but instead is simply transferred into one place so that it is easier to manage.

A debt settlement agreement can also impact your credit score for 5 to 7 years depending on the total amount due, while debt consolidation should not impact your credit score unless you fall behind and begin to miss payments. If you can consistently make your payment every month, this will actually help to improve your credit score over time.

It is necessary to do your research when developing a comprehensive debt relief strategy. This will help you in coming up with a plan and a budget that actually meets your needs and does not cost you more in the long run. It is also important to only work with trusted professionals and organizations so that you can actually come up with a plan that is benefit for you. Contact us at Liberty Debt Relief to see how we can advice you towards more financial freedom.

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What You Should Know About Debt Consolidation

Is Debt Consolidation An Option for You?

Debt consolidation consists of a loan to combine all your unsecured debt into one place and pay off the balance gradually with just one monthly payment. Additionally, this option gives you the ability to have a potentially lower interest rate. It is crucial to note that this approach also comes with additional penalties if you ever fall behind on payments. Before considering this solution, it is essential to make sure you are thoroughly aware of the following aspects:

One Single Payment

With this solution, all of your debts are combined into one payment. If you are struggling with managing multiple payments all in separate accounts, this allows you to consolidate and ultimately makes it easier to budget and plan.

Does Not Immediately Pay Off Your Debt

One important thing to remember with debt consolidation is that your amount due is only consolidated, not immediately paid off. If you are having trouble making your payments due to financial difficulties, this will not reduce what you owe. However, your interest rate may be lower.

Lower Interest Rate

The lowered interest rates are what make this solution ideal for some. If you are struggling with multiple high-interest credit card payments, debt consolidation can help by lowering your rate and decreasing the overall amount of interest you are required to pay over the lifetime of the loan.

There is a Cost

There are often much harsher penalties imposed on these types of loans. For example, if you have to put up collateral (such as home equity or a car) to secure the consolidation loan and then fall behind on payments, you are liable to lose whatever asset you used.

Longer Repayment Period

To make up for the lower interest rate on a debt consolidation loan, you will be paying less each month. This means, depending on the amount of your monthly payment, you will have a longer repayment period. Depending on your financial situation this may not be a concern, but it is something to take into consideration when developing a debt relief strategy.

Can Help to Improve Your Credit Score

If you can consolidate your debt and consistently make your monthly payment, this will prove to the credit bureaus that you are financially responsible and adequately managing your debt. Eventually then, this will help to improve your credit score over time.

Debt Consolidation Pros and Cons

Pros

  • Single debt payment
  • Lower interest rate
  • Can help your credit score

Cons

  • Debt is not immediately paid off
  • Harsher penalties for missed payments
  • Could lead to a longer repayment period

Regain Control

It can be beneficial during this stage of debt consolidation to identify what caused you to fall so far into debt. Was it an unexpected expense that caused your budgeting to spiral out of control? Overspending? Or a medical emergency? Identifying why you are in debt will help you to determine what steps you can take going forward to avoid taking on additional debt or plan for the unexpected. Liberty Debt Relief can give you advice that keeps you in better financial standing.

Life happens, and debt is a common problem that many people face today. However, there are options, like debt consolidation, available to help you regain control of your finances and debt. It is essential to do your research and only work with trusted organizations to order to find sustainable debt solutions that work for you.

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