While dealing with debt comes easy to some, for others, it’s significantly more difficult. This might be due to their low income, high expenses, or simply because they have too much debt to handle on their own. The good news is, if you are struggling with debt, you don’t have to tackle it all by yourself. There are several debt relief options that exist for Americans to help them manage and eliminate their debts.
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Finding The Right Option
Finding the right option for your debt relief can be tough. Sometimes you have no idea what your options are. Sometimes you’re unsure of what will work best for you and your situation.
In an effort to help familiarize you with some of the debt relief options at your disposal, we have decided create an article introducing and comparing two of the most popular, which are “debt consolidation” and “debt settlement”. Our article will also include a discussion of which option works best for certain people, as well as talking about how each option will affect your credit score.
What is Debt Consolidation?
Debt consolidation is when you lump all your other debts together, then pay them off using a single loan, otherwise known as a “consolidation loan”. So, instead of dealing with a number of different debt payments to different creditors at different times, you will have a single payment to make for all of your debts.
Keep in mind, however, that not all types of debt can be consolidated. The debts from your credit cards, utility bills, unsecured personal loans and most other unsecured credit products can will qualify for a consolidation loan. On the other hand, the debt from your student loans, mortgage, car loan or any other secured credit products, will usually not qualify.
Does consolidation damage your credit score? Find out here.
Consolidation loans are normally acquired through banks or other financial institutions. One of the main benefits of this kind of loan is that you’ll usually be offered a better interest rate to go with it, which makes it a good option for the majority of consumers. In addition to the potential financial benefits of a debt consolidation, the loan will also be much easier to handle. While you aren’t paying any less each month, one large payment can often seem more manageable than several smaller ones. Furthermore, making your bills more manageable is one of the best things you can do to help alleviate the stress associated with being in debt.
There are several different options for debt consolidation. These include balance transfers, personal loans, line of credits or home equity loans. Of course, be sure to read the terms and conditions of the agreement before you officially agree to anything. Depending on the size of your debt, many consolidation loans need to be secured with one of your assets, like your home or car, so you need to make sure you keep up on your payments.
For more information about bad credit debt consolidation, read this.
What is Debt Settlement?
Debt settlement is essentially an agreement or negotiation between you (and/or your credit counselor) and your creditors, with the goal “settling” the debt for less than you owe. For example, if your debt total is $10,000, you might try and settle for $6,500.
Not sure what credit counseling is? Look here.
It’s important to be wary of the fact that creditors are not required to even enter negotiations with you regarding a debt settlement. So, why might they even consider settling for less? Well, often a creditor prefers to recoup some of their money as opposed to none at all. Also, advanced techniques for collecting debt can be expensive and no one likes to fight through the bankruptcy process, so some creditors will definitely have be motivated to accept your settlement.
Once you settle your debts, they are gone forever, which is a great feeling. However, a settled account can damage your credit report and credit score, which can make it quite difficult for you to take out loans in the future, until your credit has been repaired. As a result, you should be sure to speak to a financial expert or a credit counsellor before you agree to settle a debt.
For a few credit repair tips, check this out.
Which Option is Right For You?
Now that you know the difference between debt consolidation and debt settlement, how do you choose the one that best suits your financial needs? To help yourself make an easier decision, ask yourself the following questions pertaining to each debt relief option:
- Do you have a bunch of different credit accounts that you have trouble keeping track of?
- Do you make enough money to keep up with your payments?
- Are you looking for a lower interest rate to save money?
- Is the health of your credit score a serious concern for you?
- Have you accumulated too much debt to keep up with?
- Is your income too low to continue to make your payments?
- Are you looking for a fresh start?
- Is being debt-free more important than the health of your credit score?
- Do you have credit accounts in collection?
While the option you choose will depend on your situation, it’s typically in your best interest to try for debt consolidation before attempting to settle your debt, as it will likely be less harmful to your credit in the long run. The only time that a debt settlement should be your first option is when you’re trying to avoid a looming bankruptcy, or if the damage to your credit has already been done.
If these solutions aren’t appealing, you can also try a debt management program.
How Do These Options Affect Your Credit Score?
As we have discussed briefly, both of these debt relief methods have the potential to affect your credit score in a negative manner. For a debt consolidation loan, your credit will take a major hit if you fail to keep up with your payments.
For debt settlement, there is no real to avoid having it negatively affect your credit score. As a result, it is best to wait until your credit is already hurting before attempting to settle with your lender. Debt settlement will remain on your credit report for years, so building your credit back up (especially since it will be harder to get a loan) can be a tough and lengthy process. As for exactly how much these debt relief options will hurt your credit score, it will depend on how well you abide by the terms set out by the bank and/or your creditors.
For some more debt solutions, take a look at this.
Interested in One of These Debt Relief Options?
The option that you choose will depend on your wants, needs, and the severity of your debt problem. However, the good news is Rebound Finance can help! We can connect you with the best debt relief service for your personal and financial needs.