According to statistics, 80% of Americans are in debt. Worse still, the number of people in debt continues to increase over the years. This is an inconvenience to some Americans and destroys the lives of others, especially widows and single parents.
Fortunately, individuals with significant debt can use financial strategies, such as debt consolidation and debt settlement, to improve their personal debt burden, depending on their circumstances. This article explains what debt consolidation and settlement is and advises on what strategy borrowers can use to get good debt settlement ratings.
What is debt consolidation?
This is a debt management strategy that combines several debts into a single payment. Debt consolidation helps consumers save time and money by transferring their debt to a lender with a lower interest rate. The basic idea is that it is easier to deal with one lender than it is to balance multiple debts from different lenders.
For starters, this is how debt consolidation works. If you owe a creditor $100 per month at 15.99% interest, another collector $100 per month at 8% interest, and a third $100 per month at 20.11% interest, you can apply for a consolidation loan and the three settle debts in one go. What happens, you owe the new creditor $300 per month under a single interest.
For individuals who are strategic about consolidation methods, they can even get a reduced interest rate. as low as 4.52% to 7.37%. become excellent debt settlement reviews, it is essential to work with professional debt companies.
What is debt settlement?
Although riskier than debt consolidation, debt settlement can lower a borrower’s credit score by 65 to even 125 points. This strategy involves negotiating with your creditors to reduce the amount you owe them on your debt.
A debtor offers the creditor a lump sum prepayment, which is less than the total amount owed to forgive his debt. While it may seem illogical that a lender would accept less than what the debtor owes, it is important to realize that approximately 10% of Americans are expected to take 10 years to pay off their credit card debt; some don’t even expect the balance to be refunded. In fact, some creditors prefer to get what they can immediately than to risk the chance to receive the full balance in ten years or even longer.
However, it may even take months or years of negotiation to convince lenders to work out a debt settlement scheme. Even though this strategy can be stressful, lengthy and complicated, it will help you get rid of your debt. That said, debt settlement is a more appropriate option than bankruptcy in many cases, although it can also negatively impact your credit score.
Which Is Better Debt Consolidation Or Debt Settlement?
There is no debt relief strategy that is better than the other. It all depends on your circumstances. That’s why it’s important to carefully evaluate your options before choosing a debt relief strategy.
Despite this, debt consolidation can be more beneficial than debt settlement, especially your credit. Once you consolidate your debts, it leads to a credit dip because a credit card balance transfer application requires a hard credit investigation. While you could have a longer period of time before you finish paying the debt, if you are strategic you will have an excellent financial footing by the time you make the final payment.
On the other hand, a debt settlement option is: available once your account is overdue. No sane lender will consider reducing the amount owed if you pay regularly. Missed payments will hurt your credit, and once you’ve missed enough payments, the lender may be open to negotiation, but you could miss out even more in the process of reaching a settlement agreement.
What you should know is that the settlement will have a negative effect on your credit report and will show a balance of zero, although a note will show that the bill was paid for less than the amount owed. This information stays in the credit report for seven years, severely affecting your ability to apply for a new mortgage, business loans, or other major financial agreements.
Debt settlement is especially preferred by families who are already past due on loans. But for individuals whose debts are current with one or two missed payments behind, debt consolidation will be a better financial option.
How Freedom Can Help Debt Relief
Getting out of debt seems impossible for most American homeowners, especially when strategies like debt consolidation replace debt with other debt. Don’t worry though. Our professionals at Freedom Debt Relief help you choose a sustainable and healthy method of debt relief.