Debt Settlement and Debt Consolidation are two popular financial strategies that can help you improve your debt load. However, both these options function entirely different and both aim to fix different issues.
At the heart of it, settlements seem to reduce the overall amount of debt that you owe while consolidation aims to reduce the bad credit loan.
What Exactly is Debt Settlement?
This is basically a series of negotiations with creditors wherein you try to reach an amount less than what you owe. This option mostly works when you’re dealing with a single creditor. However, you can use it in the case of multiple creditors too.
What Exactly is Debt Consolidation?
This method involves combining multiple debts from multiple creditors and aims to pay them all at once, usually at a reduced rate of interest. The monthly payment is also low. This method is most popular with unsecured debts and in situations where you’re trying to pay for multiple credit cards.
Check out this three-way comparison to find out which method may be more suitable for you.
Method 1 – Comparison by ‘Assessment of Your Financial Situation’
Calculate how much debt you owe
Get a copy of your report and see how many loans you owe. Analyze the total amount as well as the interest on all of them. Note down the status of each loan.
Find out your Credit Score
Your credit report should have this score. You’ll need to check this if you plan on pursuing debt consolidation immediately. Alternatively, you can delay the whole thing and get some time to improve your score. But the delay should be worth it because usually, it means you’ll be paying more in interest over time.
Analyze your monthly bills
Analyze your budget, monthly expenses, and realistically find out how much can pay each month towards loans. Take into account the monthly inflow and outflow of funds. Use these numbers as your monthly payment goal while weighing your options.
See if you can Make a Lump Payment
If you have a couple of funds set aside, you can always use a few of them towards debt relief. Ideally, you would want to make one lump sum payment. This option should save you a lot of headache in the long run. But, be sure to have emergency funds as well otherwise you may need to take out another loan in case of emergency.
Method 2: Comparison By the ‘Available Repair’ Options
By ‘eligibility for loan’
Not all loans are eligible for settlement or consolidation. For Example, debt settlement focuses mainly on unsecured debts. The same is with consolidation but there’s more room for flexibility here. So, tread accordingly.
By current ‘interest rates’
If the interest rate on your current account is particularly high, you might want to check out ‘consolidation’. Even though the overall balance may be higher, you can always negotiate for a low-interest rate which lowers the overall cost of balance by letting you pay directly. Always go for a fixed-rate consolidation plan.
The ‘Tax Impact’ Aspect
Any money you’ll save via debt settlement will be seen as taxes legally. Your creditors can always report such information to the IRS. This is not the case with debt consolidation. It will rarely impact your taxable income. If you’re confused about your options, talk to a tax advisor or a CPA.
The ‘impact on your credit’
Consolidation will leave with a large amount owed but you can avoid this from impacting your credit score by ensuring timely payment. Debt settlement generally lowers your credit score in the short term but if you make new payments consistently or pay the entire debt off, it should not offset that negative impact.
The ‘collateral safety’
With a consolidation loan, you’ll usually be asked for some kind of collateral, unless your credit score is perfect. Collateral can be your home or your car. While this will make your loan ‘secure’, in case of failure to make the loan payment, lenders could any minute seize those collateral and use it towards the loan payment.
With debt settlement – since you’re not taking out a new loan, you’ll avoid facing seizure.
The ‘overall repayment period’
With consolidation, in exchange for a lower interest rate, you’re getting extended periods of loan repayment. Longer periods often translate to you inadvertently paying more in interest alone over time even though you’re getting a low-interest rate.
With a settlement, the terms are abbreviated. So, you can be done with the entire loan in one lump sum and avoid paying ‘extra’ in interest. That’s something to be taken into consideration when looking at your options.
Method 3 – Comparison by ‘Debt Relief Assistance’
See if the DIY route is for you
If you’re confident you can gather all the paperwork and step on top of everything like communicating with the creditors and everything, then it’s good to go the DIY route. But, it’s always good to work with a debt settlement company as they can negotiate a loan or settlement number on your behalf.
Alternatively, you can work with a debt settlement lawyer too. However, make sure the terms of your contact including how you’ll be paying them are crystal clear before you choose to work with any of those.
Check out company reviews
If you choose to work with a debt relief company, be sure to do your legwork. Check out company reviews online and thoroughly read all of them to get a good sense of what kind of company you’ll be working with. Look for the reviews dating as far back as possible. In the end, always follow your intuition and instincts.
Check for Licensing of the company
It’s always good to get in touch with your Attorney General to see whether or not the company you’re contemplating working with is properly licensed to work in the debt relief arena. Check with BBB (Better Business Bureau) to see if the company is in touch with them and also if it has filed any complaints agaist customers in the past.
See if bankruptcy is an option for you
If you’re buried under such a mountain of debt that you’re unsure if either of the options will truly work for you, then there’s always the option to file for bankruptcy. It will erase some of your present debt while also letting you keep some part of your property. Bankruptcy might give you relief from a really big debt but it will harm your overall credit score in both long and short term.
Hopefully, the comparison gave you crystal clear insight on what route would work better for you. In the end, there’s no BEST option. There’s only BETTER option based on your needs.