You’ve made a commitment: you’re going to pay off your debt. The question, now, is how best to go about it. A starting point is to calculate potential savings with a debt consolidation calculator. This is really looking at savings based on a lower interest rate over a set period of time. The next decision is what tactic to use – debt settlement or a debt consolidation loan? While these two may sound similar, they mean two very different things. Here’s what you need to know about each option.
Debt Consolidation 101
Debt consolidation is a popular approach for people who want to regain control over their financial situation. Debt consolidation takes various debts and rolls them into a single, blanket loan with a single monthly payment. Debt consolidation comes in a few different forms. People can get a balance-transfer credit card, a debt consolidation loan, a home equity line of credit (HELOC) or a 401(k) loan, for example.
Debt consolidation is an excellent option for many people. Here are a few benefits of it:
- Debt consolidation lowers interest rates and helps you save money in the long-term. It’s also an excellent way for people to pay their debts off sooner.
- Debt consolidation can eliminate manageable debt. While it’s not ideal for large debts or overwhelming debt loads, debt consolidation is a great approach to paying down manageable debt amounts and kinds.
- Debt consolidation reduces the number of monthly payments. If you’re getting overwhelmed by the number of payments you’re making each month, debt consolidation can help. By rolling all your payments into a single payment, consolidation enables you to take control of your finances.
Debt settlement is different from debt consolidation. The approach looks like this: you work with a debt settlement professional who advises you to withhold payments from your creditors. Once the account is very past due, you work with that debt settlement professional and the creditor to negotiate a smaller amount that will satisfy the debt and close out the account.
The downside of this approach, though, is that withholding payments and having past-due amounts destroys your credit score and puts you at risk of lawsuits for nonpayment. As if that weren’t enough, there’s not any guarantee that the creditors will settle for a lesser amount.
Debt settlement is very rarely a good option for consumers. As a general rule, people might choose debt settlement if they have an account that’s already quite delinquent or in collections. If it’s likely that a creditor will accept a partial payment, debt settlement may be a good option, especially if the damage to your credit score has already taken place. If you’re interested in pursuing debt settlement, hire a professional debt settlement company. This reduces the risk of you taking the wrong road and helps reduce the possibility of damage to your financial life.
Which Option is Right For You?
As a general rule, debt consolidation is the way to regain control of your financial life. Debt settlement applies to very few people and is not always a great option. If you’d like to learn more about either option, there are a variety of debt resolution companies and experts you can contact.