If you have a significant amount of debt, tools such as debt consolidation and debt settlement can help you regain control of your finances. Each option operates differently, and, when efficiently used, can help you out from under a mountain of debt. Here’s our guide to understanding the differences between debt consolidation and debt settlement.
Debt settlement is when a borrower agrees to pay a lump sum portion of the debt, and the lender forgives the remaining debt. Research has shown that recovering credit card debt often takes over ten years. Banking on the fact that some credit card debt is never recovered, some lenders are open to the idea of accepting a smaller amount immediately. While some lenders may not offer the option of debt settlement, others could take years of negotiations before they arrive at an arrangement. Since debt settlement is only an option for defaulting accounts, it can feature on your credit report for up to seven years, negatively affecting your credit score.
On the plus side, debt settlement is a permanent solution to eliminating debt.
Debt consolidation involves paying off multiple high-interest debts through an additional loan. This strategy allows you to organize your finances and combine all your debt into a single payment. Debt consolidation offers benefits, including lower interest rates that help you save money over the repayment tenure.
Debt Consolidation Methods
If you have healthy credit and a credit score above 680, you could access a balance transfer credit card with a 0% interest rate. Credit cards that offer a balance transfer facility are a great way to consolidate debt, but keep in mind that the 0% interest usually lasts only for a limited period. The other option is to apply for a debt consolidation loan. Depending on your selected lender, you could end up paying as much interest as with a credit card.
Advantages of debt consolidation include ease of managing a single payment and dealing with a single lender.
Now that you can differentiate between debt settlement and debt consolidation, you can soon be on your way to better finances. While these systems help you control your debt, financial discipline is essential to staying out of debt.