Living in debt can be both emotionally and mentally exhausting and can keep you feeling overwhelmed almost every day. You can get out of debt; however, it will be a long and difficult process. While some debts are inevitable, like home loans, education loans, car loans, etc., there are others which can be repaid through some simple planning and strategising.
Debt consolidation and debt settlement are two financial strategies that can be adopted to reduce the personal debt load and resolve other financial issues. However, before deciding whether you want to choose debt consolidation or debt settlement, you must know what each of them is and what they entail. You can seek either of these debt relief methods when your debt equals or is more than your gross income.
What is Debt Consolidation?
Debt consolidation is a financial debt paying strategy in which all your loans are combined into one single loan. If all goes well, the creditor might reduce the interest rate and lower your monthly payment amount. Debt consolidation options are offered by various financial institutions like banks, credit unions, etc.
People usually opt for debt consolidation to benefit from the one single payment process rather than taking care of various debt payments at one time. Consolidation loans can be secured through assets like a car, home, retirement accounts, insurance policies, etc.
Pros of the Debt Consolidation Strategy
- Reduces the mental pressure of not having to manage multiple debts at one time.
- The cumulative interest rate of consolidated debt can be lower than separate interest rates of each debt.
- You can use your credit card to repay the loan of consolidated debt.
Cons of the Debt Consolidation Strategy
- You might have to pay a fee for consolidating all your debts into one.
- Depending on the financial institute, you might be offered a debt consolidation loans bad credit.
- Failure to make payment for a consolidated loan can result in a hefty late fee and can also tag you as a defaulter.
- The entire debt consolidation repayment can stretch over a long period of time.
What Is Debt Settlement?
The debt settlement financial strategy, which is also known as debt relief, debt management, and debt adjustment is a process in which you negotiate with your creditor to pay a lump-sum amount and settle the entire debt. It depends on the credit to accept or decline the settlement offer. Creditors are obligated to accept your offer or reduce your interest rate and monthly payments.
You can negotiate with your creditors on your own or hire a financial advisor or debt settlement firm to do it for you. In case you hire somebody, you will have to pay their fee which will be calculated as a percentage of your registered debt. According to financial policies and law, any financial advisor or debt settlement firm cannot charge you until the negotiation has been reached and finalised through relevant paperwork.
Pros of the Debt Settlement Strategy
- Your debt amount can be reduced.
- It can help you avoid bankruptcy.
- It will get the creditors and collector off your bank.
- You will free yourself from the mental pressure of constantly being in debt.
- You can focus on other inevitable loans like home loans, payday loans, car loans, education loans, etc.
Cons of the Debt Settlement Strategy
- The creditors may not agree to negotiate.
- You may be charged an extra fee in the process of repaying your entire debt.
- It can negatively impact your credit score.
- If things go south, you can end up with more debt.
Things to Keep in Mind
After reading the pros and cons of debt consolidation and debt settlement, you can make an informed and well-researched choice. However, it is very important for you to be mindful of the fact that the debt relief industry is full of scammers who can take advantage of your financially compromised position. Sometimes, because of being in a desperate position to seek help and get rid of all your debt, people fail to judge the true character of people claiming to help you.
Here are some important things you can keep in mind before agreeing to register in any kind of debt relief program.
- Are there any tax implications involved? If yes, try to understand the true nature of these implications.
- Will you be expected to pay a fee for enrolling in any debt relief program? If yes, is the amount hefty or minimal?
- When will the creditor be paid the entire amount?
- Does the creditor agree with your particular debt payment method?
- Do not touch your secured debts like home loans, car loans, educations loans, etc. to pay your unsecured debts.
- Determine how much you can pay each month and how.
- Do not touch your retirement money to pay your unsecured debts.
- Reconsider all your expenses and keep in mind some opportunities which will allow you to save some money.
- Keep hunting for ways to increase your income, at least for the time when you will be repaying your debt continually.
- Think twice before borrowing money from your relatives, friends, or workplace.
- Do not take any decision under intense pressure and overwhelming feelings. Relax your mind before taking a final decision.
Debt repayment can be an extremely exhausting and challenging process. However, do not give in under pressure, and remember there is always light at the end of the tunnel. Do not be ashamed to ask for emotional support from your friends and family.
Take care of your mental health and try to put this behind you as soon as possible. You are not alone; there are many people who have undergone the same process as you. The best approach is to research all your options, completely understand what you are choosing and then go ahead with your decision.
While debt can be burdensome, there are also several ways in which you can make the repayment process easier, with debt consolidation and debt settlement being two great options for you to consider.