Are you torn between consolidating and settling your debts? Both of them can effectively get yourself out of debt but you have to realize that one of them suits you best. The key to maximize the benefit of the two is to choose the right one.
But how do you make the right choice? What are the factors that will tell you which is better than the other? The answer is simple: you need to know the process of both and what they can provide you in terms of a debt solution.
Debt consolidation loan involve applying for a loan that will allow you to pay off the other debts that you have. The key is to get a low interest loan that will lower your monthly payment. Because of this lower payment, you are able to bring more breathing space for your budget. That will allow you to have more funds on entertainment activities or to boost your savings.
Debt settlement, on the other hand, involves negotiating with your creditors. You will haggle with the creditor so they will allow you to pay only a portion of what you owe and have the rest forgiven. This debt reduction will get you out of debt in 2-4 years, which is faster than debt consolidation loan that can take up to 5 years to complete.
Now that you know what is involved, how will you know which is better? It helps to begin by looking at the type of debt that you owe and your ability to pay them off.
For instance, if you have a steady job and you only have a small deficit on your debt payments, you should be fine with debt consolidation loan. But if you have no income or if it is too small to meet all your requirements, then you may want to opt to settle your debts instead. While debt consolidation will lower your monthly payments it will keep you in debt for a longer time. Not only that, you could end up paying more in terms of the interest amount.
Another consideration is when your credit score is not in its best condition and you do not have a collateral to guarantee a low interest rate. If so, you have to skip debt consolidation loan and go for debt settlement. But if you have a high score and you want to keep it that way, go for the former. Settling your debts will involve defaulting on your payments and that can ruin your score.
If you also have mostly secured loans, you cannot use debt settlement to solve them. It can only work on credit card debt, personal loans, medical bills and other unsecured loan types. Debt consolidation loan on the other hand, can help with almost any type of debt. It can even help with student loans but you only get a few options as to where you can get financial assistance.
These are the facts that you have to consider when you are choosing between the two. Analyze your financial predicament carefully to know which option best suits your needs.