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Most people ignore that debt settlement and debt consolidation are two completely different processes that seldom produce the same results. Each method is performed to solve a specific problem and though they may share some characteristics, using them indistinctively can lead to serious damage to your credit and finances. A proper use of each of these methods for debt reduction will provide you with more benefits and less hassles.
Debt Settlement and Debt Consolidation
While debt consolidation implies applying for a loan and using the money obtained from it to repay existing debt thus obtaining a debt payment reduction and unification, settling implies the negotiation of debt with the creditors till an agreement is obtained within which the creditors resign a portion of their credit balance in exchange for a guarantee of repayment. Debt settlement and debt consolidation can be combined but they are clearly two separate and significantly different processes.
Through debt consolidation, there is no direct negotiation with the outstanding debt holders (creditors) but with a new lender which provides the funds to repay existing debt thus replacing the creditors but getting the security and guarantee of being the only lender holding a single and unique credit balance against the borrower.
The Decision
Whether you should consolidate or settle will depend on several factors and some questions that you need to ask yourself. For starters you need to analyze how much unsecured debt you have. Why unsecured? Because secured debt implies collateral and a simple method for the lender to recover his investment. Therefore, when assessing your debt, you should focus on consumer unsecured debt. If you have too much debt and concentrated, you should opt for settlement but if you have a reasonable amount (regardless of the fact that you cannot afford it) and spread into several loans and lines of credit, you should try consolidating first.
Your available income is also an important variable. What kind of monthly payment can you afford? If your debt situation is complex, you will not be able to get a competitive interest rate on your consolidation loan, therefore, even if you can lower the monthly payments by extending the repayment program, you will not be able to lower it that much. Thus, if you cannot afford high enough monthly payments, you should settle before consolidating.
Do you really expect your situation to improve? You should always be sincere with yourself. If you think that your income will not increase in the near future and that you are rather stuck for the time being, consolidation may not make sense because you may soon be unable to afford the payments. Do not commit to payments that you know you will not be able to afford soon because defaulting on a consolidation loan will worsen your credit and if the loan is secured (most consolidation loans are) you may be risking your property. Instead, contact a debt settlement company with debt experts and have them decide whether settlement is the right solution for you or you should file for bankruptcy to get a clean start up. Actually, if you are not comfortable making the decision or you feel that you are not sure, you can always resort to the aid of experts that can analyze your situation for you. |
