When you have gotten behind in your bills, putting off those payments mean fees and increase in amount owed. This is how one gets into debt. When your debt is overwhelming, many people look into ways to get rid of their debt. Two of those ways are debt consolidation or debt settlement. If is important to compare debt consolidation vs. debt settlement to determine the best for you.
Debt Consolidation vs. Debt Settlement in Loan Removal
There is a big difference between how the companies handle the debt. Both companies do remove debt from your credit report.
- Debt consolidation has two main options regarding how it deals with reducing your credit. You can choose to make payments to your debt relief company and they will split that into each of your creditors. The other option is to pay all your debts at once through a low interest loan and only have one payment due per month.
- Debt settlement is different in the aspect that you negotiate a reduced payment for your debts. You or a settlement company can negotiate with creditor to reduce your payments. At which time you can make a lump sum payment, or paying off the left over debts quickly.
Debt Consolidation vs. Debt Settlement on Credit Score
The credit score troubles you have with extensive debt will be changed when using either of these debt relief approaches.
- Debt consolidation tends to have a balancing effect when it comes to your credit score. When you take out the consolidation loan you will be effecting by adding a debt. However, as you close the other account, with a paid off status, you will gain some points back. Here is where the balance came in, you will become in good standing quicker and it won’t reduce your score much.
- Debt settlement can be a huge hit to your credit. When the accounts care labeled as “settled” this is a negative mark on your score. This can make you unable to gain new credit for several years. There is however subprime credit designed for those with bad credit and trying to recover or regain a positive credit score.
Debt Consolidation vs. Debt Settlement and Interest Rates
One of the biggest things that add to your overall debt is the interest rates. Usually with consumer or credit debt your interest rates are extremely high.
- Debt Consolidation offers the possibility of reducing your interest. With debt consolidation the credit counselor will negotiate on your behalf with the creditors to reduce the interest rates. The credit counselor can also help you to find a low interest loan if you choose that option.
- Debt Settlement has the ability to reduce the interest that is paid. As debt settlement reduces the total cost that you’re paying, therefore it will reduce the amount of interest paid. You’re able to settle a reduce amount that can include reducing the amount of interest that needs to be paid.
Debt Consolidation vs. Debt Settlement Programs
When you’re looking at the different programs available there are some facts that you want to consider about each type of debt relief.
- Unwanted calls from creditors: With each program there is the possibility of stopping those calls. The debt relief company that you choose will try to negotiate in order to stop all collection activities; however the creditors are legally allowed to contact you.
- Maintain my privacy through the proceedings: The answer is yes. Both through debt consolidation and debt settlements you’re able to maintain privacy.
- Taxes: When you pay off things or purchase large things you can sometimes be penalized or required to pay taxes. With debt consolidation there are no extra taxes that one is required to pay; however you may be asked to pay taxes on any amount that you have been forgiven of when going through a debt settlement.
- Program Fees: There is no set fee structure that is to be followed. So no matter which program that you participate in the fees will vary. However some fees you might see in the case of debt consolidation are enrollment fees, representation fee, monthly fees, even the possibility of a closing fee. Debt settlement is a bit different because you will home more one time fees rather than monthly. For example you can have a success fee, or negotiation fee depending on the services that you use.
Each person has different reasons for being in debt; each person has different ways of getting out of debt. The same is true of debt relief programs each one is different, and each company is different as well. Be sure to choose the program that is right for you and ask questions be sure to know all the facts about the program and the company that you choose.