According to statistics, 80% of Americans are debt-ridden. What’s worse, the number of individuals strapped with debt continues to increase over the years. This is an inconvenience for some Americans and ruins the lives of others, especially widows and single parents.
Fortunately, individuals with significant debt can use financial strategies such as debt consolidation and debt settlement to improve their personal debt load, depending on their circumstances. This article explains what debt consolidation and settlement are and advises on which strategy borrowers can use to get good debt settlement reviews.
What Is Debt Consolidation?
This is a debt management strategy that combines various debts into a single payment. Debt consolidation helps consumers save time and money by transferring their debt to a lender with lower interest. The basic idea is that it’s easier to deal with one lender than balancing multiple debts from different lenders.
For starters, this is how debt consolidation works. If you owe one creditor $100 per month at 15.99% interest, another collector $100 per month at 8% interest, and a third $100 per month at 20.11% interest, you can apply for a consolidation loan and clear the three debts at once. What happens, you owe the new creditor $300 per month under a single interest rate.
For individuals who are strategic about consolidation methods, they could even get a decreased interest rate. as low as 4.52% to 7.37%. To get excellent debt settlement reviews, it’s essential to work with professional debt companies.
What Is Debt Settlement?
Though it is riskier than debt consolidation, debt settlement can lower a borrower’s credit score by 65 to even 125 points. This strategy involves negotiating with your creditors to reduce the amount you owe them on your debt.
A debtor provides the creditor a lump sum payment upfront, which is less than the total amount owed to remove their debt. While it may seem illogical that a lender would accept less than what the debtor owes, it’s important to realize that around 10% of Americans are expected to take 10 years to settle their credit card debt; some don’t even expect the balance to be repaid. In fact, some creditors prefer to get what they can immediately than take the chance of receiving the entire balance in ten years or even a more extended period.
However, it might even take months or years of negotiation to persuade lenders to work out a debt settlement arrangement. Even though this strategy can be stressful, lengthy, and complicated, it will help you get rid of your debt. That said, debt settlement is a more suitable option than bankruptcy in many cases, although it can also negatively impact your credit score.
Which is Better Debt Consolidation or Debt Settlement?
There is no debt relief strategy that’s better than the other. It all depends on your circumstances. That’s why it’s important to evaluate your options carefully before selecting a debt relief strategy.
In spite of that, debt consolidation may be more advantageous than debt settlement, especially your credit. Once you consolidate your debts, it leads to a dip in credit because a balance transfer credit card application requires a hard credit inquiry. Though you could have a more extended time before you finish paying the debt, if you are strategic, you will have an excellent financial footing by the time you make the last payment.
On the other hand, a debt settlement option is available once your account is delinquent. No sane lender will consider lowering the amount owed if you are making regular payments. Missed payments will hurt your credit, and once you’ve missed enough payments, the lender may be open to negotiation, but you may even miss more during the process of agreeing on a settlement.
What you should know is that the settlement will reflect negatively on your credit report and indicate a zero balance, though a note will show that the account was settled for less than the amount owed. This information remains on the credit report for seven years, hence seriously affecting your ability to apply for a new mortgage, business loans, or other major financial agreements.
Debt settlement is mainly preferred by families already delinquent on loans. But for individuals whose debts are current with one or two missed payments behind, debt consolidation will be a better financial option.
How Freedom Debt Relief Can Help
For most American homeowners, getting out of debt feels impossible, especially when strategies such as debt consolidation replace debt with other debt. Not to worry, though. Our professionals at Freedom Debt Relief will help you choose a sustainable and healthy debt relief method.
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