Are you struggling to repay your multiple bills and cannot decide which option will suit you the best – settlement or consolidation? Here is a brief introduction to each of the two methods, which will also help you know how you can choose your preferred option.
Debt settlement is an option where you or a professional agency, on behalf of you, negotiates with your creditors to reduce the payoff amount, so that you can get rid of your debts quickly. If you opt for a settlement program, the settlement company will decide upon a monthly payment which will get deposited into a settlement account (when you make the payment) created in your name. After accumulation of enough funds and any of your creditors agreeing upon a reduced payoff amount, the settlement company will pay the amount and you’ll get rid of that debt. Like this, you will get rid of your debts, one by one.
If you choose DIY settlement, then you’ll have to negotiate with your creditors and/or collection agencies on your own, plan a budget and save as much money as possible, every month. However, while settling on your own, remember to make any payment unless you sign a written agreement with your creditors on the agreed payoff amount.
The primary idea of consolidating your unsecured debts is paying them back with the help of single monthly payments, and at a reduced interest rate. You can consolidate your debts on your own with the help of balance transfer method, take out a loan from a financial institution or opt for professional help.
If you opt for professional help, then you’d have to enroll in a consolidation program, wherein a counselor, on behalf of the consolidation company, will assess your financial situation and decide upon a monthly payment which you need to make to the company every month. It will also negotiate with your creditors to reduce the interest rates on your debts so that you can repay them faster. Upon receiving your payment, the company will distribute the amount amongst your creditors on your behalf. Thus, you’d pay back all your debts within a stipulated time period.
If you opt for balance transfer method, then with your creditor’s approval, you can transfer your high interest rate credit card debts to an account with the lowest interest rate, provided there’s enough credit limit in it. In this way, you can pay back your outstanding balance faster. You can also take out a balance transfer card for the purpose; but, if you do so, remember to clear the balance before the expiry of the low interest rate period. Otherwise, you will have to pay a much higher interest on the remaining amount.
You can also take out a personal loan and repay your existing debts with the new loan. However, before doing so, make sure the interest rate on the new one in comparatively lower than the sum total of your existing loan interest rates.
When you compare between consolidation and settlement, you should know that consolidation can be the most suitable option when you are struggling to manage your multiple bills but you’re financially capable of paying back the entire balance you owe to your creditors. On the other hand, settlement can be your preferred option when you cannot pay your bills in full. However, you can decide to settle your bills with high balance whereas you can opt for consolidating your debts with relatively lower balance. In this way, you can reduce the negative effects of settlement to some extent. Your credit report will reflect that you had paid some of your bills in full whereas settled one or two of your outstanding debts.