Debt settlement involves negotiating with creditors for a debt settlement for what you owe. It is good for settling a huge debt with one lender. You can also use a debt settlement if you have multiple lenders.
What are the pros and cons of debt settlement?
Pros of debt settlement
You will pay much less than you initially owed in debt. Your representative will negotiate a debt settlement for you with your creditor, which is much less than what you owe. When the creditor accepts your offer all you have to do is make the payment to settle the debt. If you owe money to more than one lender, you must make the settlements to each one.
Cons of debt settlement
You will still have to pay the additional fees on your dept settlement. As you wait for a negotiation between your creditor and representative, the interest rates, late fees and penalties will continue to grow. These payments will be added onto your debt penalty fees when you make the payments the time frame for a debt settlement is between two to three years, meaning you will make the penalty payments for all that while.
It has a negative impact on your credit score and credit report. The late payments will reflect on your credit history, which will lower your credit score in general. This partial settlement will remain in your credit report for up to seven year.
Debt settlement companies do not do it for free. They charge a monthly fee which you must pay when you are making the debt settlement monthly payments. The fee can cost up to 25% of your debt settlement
Debt consolidation is combining all your debts from different credit accounts and making a single payment on one combined account. If you have a good credit, you can make the payments at a reduced monthly interest.
What are the pros and cons of debt consolidation?
You will pay a lower interest rate on your loan. When your credits are all moved to one account, your interest rates will only increase on one credit. This means you will pay much less than when you had multiple credits at once.
There is less risk in losing your assets to creditors. If you fail to make payments on your multiple credits, creditors will redeem your assets as collateral to make the payments. With a debt consolidation, you can make the payments on time and reduce the risk of losing your collateral.
Your creditors may not accept your consolidation plan. When you combine all your credits into one credit account, the creditors lose their interest rates and late payment charges. They may sue you for violating the contract you signed when you accepted the loan
With a debt consolidation plan, you have no say over the payment methods. The consolidators will decide who gets what payment and when. They can decide to make full or partial payments on your credit accounts
Debt settlement provides a short term answer for people with a minimal debt crisis while debt consolidation is a good long term solution if you have a bigger debt.