Debt settlement and debt consolidation are two most commonly used financial strategies that help people to manage their personal debt load. Due to lack of awareness, many people use these terms interchangeably, and it often leads to much confusion. Hence, it is important to understand the prime difference between them.
In case of debt settlement, you negotiate the amount with creditors so that it can be settled down at a lesser amount as compared to what you have borrowed. In general, this method is followed to reduce the debt from single creditor; however, you can also apply this strategy for multiple creditors as well.
On the other side, debt consolidation is useful to combine multiple debts that are taken from different creditors. As a result, you are responsible for repaying the singleloan and that too at the lesserinterest rate and reduced monthly payment.
Consolidation loans help people to consolidate their debts and get them combined into a single loan. Earlier, you were giving separate instalments for every loan with the variableinterest rate, butafter consolidation, the debtoris responsible for repaying only one instalment per month. Such loans are usually offered by numbers of financial institutions including credit unions and banks.
In most cases, the payday loan consolidationneeds some security in terms of your fixed assets such as retirement account, car, home or insurance policy. It is advised to accept a secured consolidation loan only if you are willing to put the considerable collateral for it.
Reasons to choose Debt Consolidation:
· If you are paying a hugeinterest rate on your multiple credits at present, this strategy can help you save some money on monthly payments.
· Consolidation of credits ispreferred to get rid of the stressof managing multiple payments every month.
· It must be chosen if you are okay with paying some manageable amount per month.
Instead of replacing your existing loans with a new one, debt settlement is actually a series of negotiations that you make from loan creditors to reduce the repayment amount from the actual debt amount. The idea is to settle the loan on some lump-sum payment that can be agreeable to both parties.
Generally, it is very difficult to convince a creditor for the loan settlement. You can be successful in this task only if you give a valuable offer to the creditor for recovering some portion of the actual loan. A person can handle debt settlement at his own or get services from a reliable company. Note that, these strategies harm your credit score and can make it difficult to get another loan in future.
Reasons to choose Debt Settlement:
· It must be chosen only when you are ready to accept damage to your credit score.
· Debt settlement becomes a suitablechoice only when you get the reliablecreditor to make the settlement for partial payment. Well! If you have multiple debt accounts; it is better to go ahead with the debt consolidation. The settlement option is consideredonly if you can bear the damage to your credit score.