Debt Consolidation vs. Debt Settlement

Part 1 of a 2 Part Series:  Oftentimes, I am asked about debt settlement and debt consolidation. The post below compares and contrasts the two debt relief options.  

Eliminating debt is still at the top of many people list.  Some people may have small amount of debt that requires commitment and disciplines to squash.  However, some people are drowning in debt and are looking for a life raft. The bills come in every month but in reality, there is no real way of paying everything back. Something needs to change. While there are several options for consumers to consider, debt settlement and debt consolidation tend to be popular choices for those looking to create a more manageable financial situation.

Debt Settlement and Debt Consolidation Similarities

Both settlement and consolidation can save money when it comes to dealing with debt. While settlement decreases the overall amount due, consolidation reduces the fees and often helps a person get past some of the late fees and over the limit fees that are creating more of a problem. In either case, less money will be required to get out of debt versus just leaving things the way they are and attempting to handle them without assistance.

Settlement and consolidation are best handled with some type of professional assistance. Individuals can call to make adjustments to their balances or interest rates, but they are usually not as successful as someone with a bit more experience. In the same way, a person can choose to take out a loan and consolidate a large amount of debt alone. However, a professional is often able to provide better rates and a better selection of opportunities.

The goal of each method is the same and neither one will eliminate debt completely. In some way, the person looking for a solution will need to contribute. He or she will either need to pay the remainder of the balance on the loan settlements or pay the new loan created with the consolidation. Both require hard work but can make a real change in a person`s financial future.

Debt Settlement and Debt Consolidation Differences

Debt settlement involves speaking with a lender or creditor and attempting to negotiate the balance. Instead of paying off the entire amount due, a negotiator looks to find an amount that will work in place of the actual balance and still have the account considered paid in full. Sometimes negotiations only have a small portion of the debt removed while at other times, the amount is fairly sizeable. Either way, a person benefits from being out from under the weight of the entire debt.

Debt consolidation doesn`t change the balance of the debt. Instead, it works to reduce the number of lenders involved. Paying multiple creditors can be confusing and cause problems with balances and fees. Consolidation involves coming up with a new loan and paying off all of the others. When the process is complete, there is only one loan and one lender to deal with. This is a lot easier for people to handle. In some cases, the one payment a month ends up being less than the combined minimum balances on all of the different loans and credit cards.

Both options provide solutions, but it isn`t always easy to determine which one is best. Most people start by checking a debt calculator. It will show how much money is due and how things will change based on both solutions. A person can determine whether debt consolidation or debt settlement is the best choice and which one will help them to become debt free in the most efficient manner.

 

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