If you are a US citizen who has 26 percent of your monthly income on debt, then you would like to get out of your debt quickly. You would love to make one low payment every month and settle your dues without being financially ripped off. All of this gives you relief. You are so carried away that when getting an opportunity to dig out of your debt, you sign the agreement without exploring the risks associated. With so many options, it is easy to get confused and choose the wrong loan provider. Before you decide anything, learn how debt settlement and debt consolidation work, and which of these is your best bet? However, do not let confusion get the better of you, forcing you to take an ignorant decision. Both debt settlement and a consolidated loan are two kinds of financial assistance for those in huge debt. Borrowers use any of one of these methods to repay the loan taken.
When it comes to debt settlement, it involves negotiation with creditors to clear debts for less than the amount borrowed. According to an article published on https://www.huffingtonpost.com, the settlement is beneficial when you have a bad credit score and unable to pay your bills. In such a situation, when you have a professional debt settlement company, it will negotiate to make you feel stress-free and reassured. Debt consolidation, on the other hand, is combining debts from multiple lenders, and then taking a single loan to pay off all the debts. Such a loan has a low monthly and interest payment. Read on this article to learn about the differences between debt settlement and consolidation to make an informed decision.
Debt Settlement Risks
When you want to repay your debts faster and at low monthly payments and to pay less than what you borrowed, the risks of a settlement program are high. According to experts in the industry, the hazards of such programs will make your financial situation worse than when you started. Therefore, you must avoid such programs that put you at risk. Here some of the risks involved:
Interest and Penalties Will Add up
When you enter into a debt settlement program, your dues will skyrocket with interest, late fees, and other penalties due to late payment. It means that the amount will increase for each of your debts. You will need to deal with creditors and collection agencies, and eventually legal suits. With accumulating penalties and late fees, your credit report gets a hit, thus making you end up in a miserable situation than before when you never entered the settlement program.
Damage to Credit Score
Most settlement companies make you stop payment until they arrange for a substantial amount for you. During this period, your accounts will pass the due date for payment. Your accounts cannot escape from the collection agencies, and your creditors will drag you to court for non-payment. Both of these aspects will damage your credit score. Even if you manage to clear the dues, your accounts will be marked as ‘Settled.’ This way, lenders and financial institutions will know that you have a poor credit report and you failed to make payments on time. You violated the terms and conditions of the loan accounts. Therefore, before choosing any settlement agency, read the debt settlement feedback from the customers on their website. If you see positive reviews, go ahead. Else, look for somewhere else.
When you work with a debt settlement company, expect to pay high fees. Based on the service you get, you will need to shell out a 15 percent fee of the total amount of the loan settled or the money saved. A few companies will charge you more. The Federal Trade Commission warns you against those agencies that charge a fee upfront before settling a debt. Do not pay any amount before reaping the benefits of the services promised to you. When you factor in the fees, the savings you make are much less. Moreover, you may need to pay additional charges for maintaining a separate bank account meant to pay off your dues.
No Assurance of Success
Debt settlement programs may not work. These companies cannot assure you success. Moreover, your creditors will feel reluctant to talk to any debt settlement company. Therefore, you have one side of the story.
There are many ways to consolidate your multiple loans and combine them into a single account. These methods include a debt consolidation loan, 401(k) loan, home equity loan, and credit card balance transfer. When it comes to debt consolidation, it does not reduce the money you have borrowed from creditors. It moves your debt and lowers your interest and monthly payment on some of your debts. However, this depends on whether the new loan is at a reduced rate than the individual rates.
Debt consolidation restructures your finances. It is possible because such a loan removes any confusion related to managing numerous creditors and payments, multiple due dates, and numerous terms. It also provides you with a sense of relief that your debt will be cleared eventually. The method also helps in extending the time for repayment to clear all your dues.
Avoid looking at the total amount that you need to pay on a monthly basis. That is why so many borrowers opt for consolidated loans at a reduced monthly payment. However, think of the long-term. Decide whether you are willing to pay more interest over the years. If yes, then choose consolidation.
Before signing a debt settlement agreement, have a word with your creditors right away. Your creditors will like to talk to you more than a settlement company. Even if you choose settlement, read the details carefully. Go through the terms and conditions as many times as possible so that you can to know what you would expect. Figure out what the program has for you. Weigh the pros and cons. If the cons outweigh the pros, decide against it. Decide how much will it cost you and for how many years. Compare the benefits of a consolidated loan. Read the fine print and then decide which is a better option for you and makes sense for your financial situation. Think of the long-term results instead of short-term benefits.
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