DebtconsolidationsavingAdvantages and Disadvantages of Debt Consolidation vs. Debt Settlement
In the recent economic downturn, people are struggling hard to manage their finances, and in lieu of doing so they are incessantly falling into debt. However, fortunately there are two viable options; debt consolidation and debt settlement that help the debt stricken individuals to unburden them from the existing debts. Whether you enroll for debt consolidation or debt settlement you require a thoughtful consideration and a careful research. So it’s important to understand how they work and what are their advantages and disadvantages.
Definition of debt consolidation and debt settlement:
Debt consolidation is the act where the existing debts are consolidated into one debt that can be paid with a fixed interest rate. On this loan, the high interest debts are merged into low interest loan. On the other hand, debt settlement is a program where the interest rate and principal amount of debt can be reduced to an affordable repayment amount by negotiating with the creditors.
Advantages:
There are several significant advantages of debt consolidation and settlement, which you must know before pursuing any of the two programs.
Debt consolidation:
1. If you are looking for a way to reduce your debt payment and save in the interest costs, then debt consolidation is the right option for you. It lowers your interest rates and cut down your monthly payments.
2. Another primary advantage of debt consolidation is that you have to handle a single monthly payment instead of multiple debts.
3. Debt consolidation prohibits creditors from contacting debtors over the phone before 8:00 A.M., and after 9:00 P.M., regarding any issues of debt collection. So this frees you from receiving annoying calls from the creditors or debt collectors.
4. Debt consolidation also improves your credit ratings. Once all the accounts are paid off, your debts are noted as “paid in full” on credit reports.
Debt settlement:
1. The important advantage of debt settlement is that the major part of your debt is wiped off by negotiating with the creditors. So this helps you to review your monthly budget and managing monthly debt payments.
2. Debt settlement makes your monthly payments lower and affordable as it eliminates the interests and miscellaneous fees from the outstanding balance.
3. Debt settlement also relieves you from receiving annoying calls from the creditors or debt collectors, so it reduces most of the tensions of your life.
Disadvantages:
Aside from the advantages, you must also consider disadvantages. Those are as follows.
Debt consolidation:
1. Taking out a debt consolidation loan using home as collateral becomes a secured loan. So if you being default on making payments, you may lose your home.
2. Although your monthly payments and interest get reduced, you often end up paying more in finance charges as it extends the period of the loan.
3. The lower payments resulting from debt consolidation lures many people to go out and shop with the extra money. People also begin to use their credit cards again and rack up their bills. Thus, this brings a new set of financial woes to the borrowers.
Debt settlement:
1. Debt settlement can negatively affect your credit in two ways. First, the account will likely to be remained as “settled for a lesser amount” for up to seven years. Second, other creditors will not likely lend you money, which will prevent you from getting new positive accounts on your report.
2. You may have to pay taxes on the settled amount at the end of the year, especially if the lender sends you a 1099. Make sure you pay these taxes or else you will get into a trouble with the IRS.
In conclusion, this close view on the advantages and disadvantages of debt consolidation and debt settlement will help you determine, which would be the right solution for you in your financial obligations.
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