Considering debt relief? It is no daydreaming anymore. The struggling debtors can easily lead a debt free life by going with several debt relief programs available to them. However, how sooner you can regain your financial freedom with almost nil impact on your credit status depends on the type of debt relief program you will opt for. Among different options available, we will only consider the two most popular ones – debt consolidation and debt settlement. Let us get to the chore of both these choices and highlight their advantages and disadvantages in more detail.
They key to make the right choice heavily relies on how good you are in assessing your current financial status. If you consult a debt relief company for suggestion, the first question you will be asked is about your income. It will also inquire about your expenditure pattern and how much of routine spending goes towards repayment of dues.
Defining Debt Consolidation Loans
A debt consolidation loan is taken out against all existing debts summed up together. If the debtors can manage to get a good deal, he will end up making a much lower payment due to down in original rate of interest and stretch of payback period. The catch is only the debtors with a good credit score can qualify for such loan.
Convincing credit status projects you in low risk zone and that assures the creditors about getting back what you owe to them. This encourages them to lower interest rate to such a low height that the debtors can easily afford it. Some creditors may also require you to place collateral. If you can do that, it will make the interest rate plunge further. Debt consolidation applies to most of the debt varieties.
Defining Debt Settlement
Debt Settlement also involves negotiation with the creditors for a reduced payment. However, the entire process is quite different. Through a debt settlement scheme, the debtor in question sets up a separate account, known as settlement fund. The person then transfers all payments that are held back from meeting the dues to the account.
You can also hire a professional to present your case and negotiate with the creditors on your behalf. The negotiator can convince the creditors to let you pay off a certain percentage of the debt and the rest be waived. Compared to debt consolidation loan, a debt settlement scheme has more restricted use. It applies to only some selected personal loans and unsecured loans. You will never be an ideal candidate for debt settlement if you are loaded with a gigantic size of mortgage loan.
Both the options make an effective choice to help you out of debt issues. However, if we consider the impact on credit score, debt settlement will inflict a more negative effect. It is because; you are willingly holding back payment so that the creditor feel almost forced to agree to a settlement.
A debt settlement plan will expedite the process of debt relief but will damage your credit health in the most negative way. On the other hand, debt consolidation is a slow process but it leaves a lesser impact on your credit condition. Always weigh the cost and impact of both the options before making a decisive choice.