The difference between a debt consolidation and debt settlement option

Making a decision on any financial product or service is never an easy choice to make. This is especially true If you have overwhelming credit card debt. When bills are piling up each month, you may betempted to look for a quick and easy solution to your financial woes. However, it’s essential you keep a clear head—especially when you are struggling to make paymentson your current debt obligations.If you are considering going with a
debt relief or debt settlement option—It’s vital you do your research—since you will be establishing a longterm relationship with the debt relief company you chose to work with.When you come across a debt relief advertisement on debt consolidation services, you should not be quick to chose the firstonline advertisement you see. One thing you must realize is that most of the companies that claim toofferdebt consolidation services are actually advertising for different services altogether. There is a significant difference between a debt settlement program and a debt consolidation loan. Most of these ads can be misleading since a “debt consolidation” is typically described as a loan that consolidates all your debt into one—not a debt settlement program that aims to settle your debts for less than you owe. Many consumers often confuse these services and group them into the same thing, but the main thing to remember is that one is a loan product (with an interest rate) and the other is a service that helps struggling consumers settle their debts for less.If a company is advertising debt settlement as a consolidation loan option I would be wary of them altogether—as that is a serious misrepresentation and false advertising. This doesn’t necessarily mean that debt settlement is a good or bad option—it really will depends on your situation—and like anything else there are associated pros and cons with doing a debt settlement.
Before we get into the pros and cons of debt settlement, lets first provide some clarity regarding the differences between debt consolidation and debt settlement. So, debt consolidation is where debts from multiple different creditors are combined into a single loan that pays off the smaller accounts. On the other hand, debt settlement is where you negotiate with your creditors and banks in order to reduce the debt amount you owe. If you cannot get approved for a traditional debt consolidation you will next best bet will typically be a debt settlement option.If debt settlement doesn’t seem viable and you have exhausted all the alternatives that you have—bankruptcy is typically your last resort. Bankruptcy is not only costly but willalso cause severe damage to your creditworthiness and itwill take years to recoup a good credit standing.
Debt Settlement: Pros and Cons
When prospecting for viable debt relief options, if you want to pay less than what you owe with minimal negatives—debt settlement is going to be the best option available. However, debt settlement comes with its risks; that is why most financial experts will tend to steer you away from choosing this option first. Here are some reasons why financial experts might dissuade you from considering debt settlement as viable option:
Most Payment Relief with Least Negatives
There is no doubt that if you are struggling with high interest credit card debt, debt settlement provides the most monthly payment relief and least negatives associated with any other debt relief options. Although it doesn’t provide as much relief as a bankruptcy, it definitely doesn’t have many of the associated negatives either.
Fees
The debt relief company that you are hiring will negotiate with your creditors on your behalf so that they can settle for a percentage off your total debt amount. Of course nobody works for free. However,good debt settlement companies will not charge any upfront fees and will only charge you if they are able to provide results. Still like any financial service, there is always a cost associated with enrolling in a debt relief program.
Time Frame
In the long run, it may take 2-3 years for an agreement to be reached. So the negotiation process is not a quick fix by any means. During this time period you may also incur interest and fees from being late on your payments. However, this is typically included in your program and something that is already factored into your payoff. Moreover, if you compare your payoff (2-3 years) with paying credit card minimums (20-30 years) you would be paying off your debt 10 times quicker with a debt settlement option.
Impact on Your Credit Score and Credit Report
There will always be an associated negative impact on your credit score since you are missing your paymentsduring the initial negotiation period of the program.This doesn’t last forever however.On the other hand, if you are currently seeking out debt relief options, your credit may not be so good to begin with. Also, in the long term you should see a rebound in your credit score and as long as your accounts are settled you should regain your credit worthiness over time (A bankruptcy would mean 7-10 years of no credit).
No Guarantee
Like many things in life—nothing is guaranteed. It is possible that some lenders may refuse to work with the debt settlement company you hire. Creditors are not required to work with you or a debt relief company by any means. However, a good debt settlement company will not enroll accounts that they know you will get a bad deal on, although this can sometimes be tough to gauge as a lot of companies want you to include every account possible so that they can collect more fees. Just make sure to ask you representative what the typical results are for your accounts and if there are any they recommend excluding.

In conclusion, your best best is always going to be doing as much research as possible. Do not be misled by false advertisements and make sure you choose a trusted company!

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The difference between a debt consolidation and debt settlement option