Debt consolidation and debt settlement are options to help people pay off the money they owe sooner and prevent financial difficulties from escalating. Debt consolidation involves combining the existing debts into one loan or line of credit, which preferably has a lower APR. Debt settlement is when a lender agrees to forgive a portion of a person’s debt in return for receiving a lump sum of the rest of the money. Which of these two options is better for you depends on the number of debts you have, how much you owe, whether you’re up to date on payments, what your credit score is and more.
When to Use Debt Consolidation vs Debt Settlement:
When you have multiple debts: Debt consolidation is better because it allows you to take multiple existing debts and condense them into one monthly payment. Getting a loan and paying off your lenders is much easier than trying to negotiate with each of them.
When you’re behind on payments: Debt settlement is better because the negative information on your credit reports from missed payments will make it harder to qualify for a debt consolidation loan or balance transfer credit card. Lenders are also more likely to settle if they are afraid of you defaulting on what you owe.
When you want to improve your credit score: Debt consolidation is better because there is only minor damage to your credit in the short term if you apply for a loan or credit card. And in the long term, a history of timely payments to the new lender can boost your score. In contrast, debt settlement is a negative that will remain on your credit report for seven years. Plus, you’ll typically have to default on your debt in order to settle, which also leads to a lot of credit score damage.
When you can’t afford to repay the full amount: If you’re struggling to make payments while interest keeps building up, debt settlement is better because it allows you to make a one-time lump sum of only part of what you owe, while the rest is forgiven. Debt consolidation, on the other hand, does not reduce your principal balance at all. In fact, it can even slightly increase it if you have to pay a loan origination fee or credit card balance transfer fee. You’ll have to decide whether having some debt forgiven is worth the negative consequences for your credit.
When you have a good or excellent credit score: Debt consolidation is better because you stand a chance of qualifying for low rates and high loan amounts. You’ll have a great shot at consolidating in a way that will save you money in the long run. Debt settlement would bring that good score down. Plus, it might not even be possible to settle unless your credit score goes down a lot, since creditors usually settle with people who have defaulted.
All in all, debt consolidation is best for people who are capable of continuing to make monthly payments and who have good enough credit scores to qualify for low rates on a new loan or line of credit. Debt settlement is best for people who have already defaulted on their debt and cannot afford to pay it all off.
This is the process by which a lender forgives a portion of your debt in return for a lump-sum payment for the remaining balance. Debt settlement can save a lot of money, but lenders typically won’t even consider it unless you have defaulted or are close to defaulting on what you owe. … read full answer
Credit card companies may settle for a negotiated amount equal to roughly 40-60 percent of the balance owed, according to the BBB. Credit card companies tend not to publicize settlements, so there are no hard statistics on success rates or settlement amounts. But a creditor won’t accept less than you owe if they have reason to believe you’re capable of paying the full amount.… read full answer
Credit card companies are most likely to consider debt settlement if collecting more than the proposed settlement amount over time seems unlikely or not worth attempting. As a result, debt settlement usually comes into play after several missed or late payments. Plus, the more money you have for a lump-sum payment, the more likely debt settlement will be.
You should make every effort to negotiate with the credit card company yourself, rather than hiring a professional debt negotiator. If you choose to go at it on your own, make sure you get any settlement agreements in writing. Should an issuer refuse to even negotiate a lump-sum settlement payment, request that they instead reduce your card’s APR or lower your monthly payment as part of a debt management agreement.
If you owe multiple lenders, also consider debt consolidation. This will provide you with a single payment and (hopefully) a lower interest rate. You can consolidate car loans, student loans or other balances along with your credit card debt.
Finally, keep in mind that settled accounts will negatively affect your credit report and lower your credit score. Typically, a settled account will remain on your report for up to seven years.
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