Whats The Difference Between Debt Consolidation And Debt Settlement
Another two terms that people commonly confuse are debt consolidation and debt settlement. Debt consolidation is the process of taking multiple debts and rolling them into one debt. This is done typically through a debt consolidation loan. However, debt settlement is the process of settling debt typically for an amount less than what you owe. This can be done either on your own or with the help of a third party company.
Debt Consolidation: Pros And Cons
If you are overwhelmed by the sheer volume of bills arriving at your home every month, debt consolidation may be the debt-relief program you need, but only if youre able to curb your enthusiasm for spending.
If you fall behind on one credit card, it can be an uphill struggle to catch up. When it reaches the point where youre only making minimum payments on one or more of the bills, then its time to consider debt consolidation.
How To Negotiate A Debt Settlement
Debt settlement requires you to have some bargaining skills, but the process itself is not that complicated. If youre behind on one or more debts, then you would begin by reaching out to your creditor to ask if theyre open to negotiating a settlement. You can do this over the phone, but if you prefer to have a paper trail, then you can send a written request.
At this point, the creditor can do one of three things: accept your settlement offer, reject it, or make a counteroffer. If your creditor chooses to counteroffer, then you can weigh whether the amount theyre asking for is realistic for your budget.
Once you and a creditor agree on a settlement amount, you can arrange to make the payment. Again, you may be asked to make a single lump-sum payment or several installment payments, depending on the creditor. Your method of payment may vary and includes sending an electronic payment from your bank account, wire transfer, or paper check.
After a debt is settled, its gonethe remaining balance is wiped clean. However, with unsecured debts such as credit cards, you risk having your account closed completely after the settlement is made because the lender will not want to continue to grant you credit. This, along with any late payment history associated with the account, could cost you credit score points.
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Potentially Lower Interest Rate
With debt consolidation, you may be able to obtain a loan with a lower interest rate than that of your existing debts. The reduction in rate will depend mostly on your credit rating and history, as poor credit will mean a higher interest rate. Aside from the interest rate, you may also find an arrangement with smaller monthly payments. Lower payments will mean more cash available to take care of your business or personal needs.
Debt Consolidation Vs Bankruptcy Summary
The decision depends on your situation and the reasons you became overwhelmed by debt. Bankruptcy is best to avoid, but it can be better than debt consolidation. If you take out a new loan and find you cant pay it back, that can be even worse. If you still have a decent , that will help you get a consolidation loan with a lower interest rate. Another factor is the ability to pinpoint why you defaulted in the first place. The cause will help you determine your ability to pay in the future. If it was a one-time incident or loss that brought you into financial hardship, and you still have a steady income or good economic prospects, consolidation may be the best choice.
A secured credit card may also be an issue when considering debt consolidation vs. bankruptcy.
Bankruptcy makes more sense in cases where your debts are incredibly overwhelming, and your income is unlikely to be sufficient to make payments in the future. Before you decide to file, evaluate your debts, assets, and income. Make sure you have a firm grasp of where youre at financially. You should also talk to a professional to help you determine the best course of action. The key to making the right decision here is understanding your situation and the options available.
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Repayment Terms Can Be Modified
One of the important things to know about debt consolidation is that you may be able to modify your repayment terms if you took out a personal loan. This is also known as refinancing. Once youve paid a portion of the balance, ask your lender if theres a lower interest rate available or a longer term to lower your monthly payments. One or both may be possible.
What Are The Risks Of A Debt Consolidation Loan
The danger with debt consolidation is that if your credit isnt strong, you will be more likely to turn to an alternative lender, such as quick online loans or even payday loans, whose interest rates are extraordinarily high. Did you know that the estimated interest rate on a payday loan is slightly less than 600% each year?
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What Are The Benefits Of A Debt Relief Order
There are many reasons why someone would get a DRO. Some of the benefits of a DRO are:
- It will freeze your debts for a year and your creditors will not be allowed to pursue you. If you are still unable to pay your debts they will be written off.
- It isnt advertised in the newspaper although it is on the internet.
- You dont have to go to court.
- It only costs £90
Resolve Any Spending Issues
Finally, youll need to acknowledge and resolve any ongoing spending issues you may have. Without addressing the behavioral money patterns that caused the problem in the first place, its easy to fall right back into debt, Sexton says.
This includes trying not to reach for those credit cards again once theyve been paid off, as you dont want to end up back at square one.
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Pro: You Can Rebuild Your Credit
Bankruptcy will harm your borrowing reputation in the short term, but youll be able to rebuild your credit in the long run.
With your bankruptcy behind you, you could start by monitoring your credit report and taking small steps such as becoming an authorized user on a significant others credit card.
Alternatives To Debt Settlement
Instead of hiring a debt settlement company, youll often get a better deal for your overall financial situation by working with a consumer credit counseling agency. Instead of going delinquent on your debts and potentially taking a hit on your credit score, consumer credit counseling can help you stay current on your bills and pay off debt without the potential risks and longer-term consequences of debt settlement.
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What To Do If Your Situation Is Dire
Debt consolidation loans and the alternatives noted above are best for people who can qualify for a low interest rate. If youre drowning in debt and cant afford your monthly payments, it might be wise to consider credit counseling, debt settlement or bankruptcy.
While these options arent ideal, they may be your ticket to getting some relief.
So Given That There Are Feesand An Impact On My Creditis A Consumer Proposal Worth It
A consumer proposal is generally a good deal for anyone struggling in debt.
In most cases, consumer proposals can reduce debt by 50 to 80%. Any fees or costs that you might pay to a debt consultant or trustee are easily balanced by an instant relief of financial pressure and the ability to climb back from debt in a few years.
Consumer proposals must be filed by a Licensed Insolvency Trusteehowever, the trustee you choose can make a big impact in how much your debt is reduced. In other words, some trustees are better than others and every trustee interprets the bankruptcy act differently. Trustees also have a duty to the creditors and cant advocate for youthe debtorto get the best possible settlement.
If youd like us to help you select a trustee in Canada , you can book a free consultation with one of our offices across Canada).
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Will Getting A Consolidation Loan Reduce Your Interest
One of the main benefits of consolidating your debts is getting a reduced interest rate. Reducing your interest rate allows you to lower your monthly payment and pay less interest over the long term. But if you can’t lower your interest rate with a consolidation loan, or if the term is extended so that you’ll be repaying the debt for a longer time , then it’s probably not worth the extra cost and fees you’ll incur consolidating.
Pros Of Debt Consolidation
Whether you use a nonprofit credit counseling agency or go it alone, the objective is to turn an assortment of bills into a single monthly payment. If the consolidation loan or debt management program has a lower interest rate than the original debt, you can save money and lower payments. Using debt consolidation will maintain your access to credit and if your plan is successful, your credit score should improve.
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What About Attorney Fees
At Young, Marr & Associates, we understand that cost is an important consideration when making your decision. There are attorney fees associated with filing for bankruptcy. However, these fees are substantially less than the total financial benefits of filing for bankruptcy. If you qualify for Chapter 7 and can eliminate $65,000 worth of personal loans, medical bills, and credit card debt, it is much less expensive than having to pay your creditors in full. While Chapter 13 will require you to pay a portion of your debt, it is often less than what you owe. If you are required to pay your creditors in full, the amount you pay is what you owed on the date you filed for bankruptcy. There is no interest paid on the debt. This usually offsets any attorney fees. Additionally, any consolidation loan will still have fees and interest to consider.
Managing Your Auto And Home Loans
Your debts can be unsecured or secured. Secured debts usually are tied to an asset, like your car for a car loan, or your house for a mortgage. If you stop making payments, lenders can repossess your car or foreclose on your house. Unsecured debts are not tied to any particular asset, and include most credit card debt, bills for medical care, and signature loans.
Most automobile financing agreements allow a creditor to repossess your car any time youre in default. No notice is required. If your car is repossessed, you may have to pay the balance due on the loan, as well as towing and storage costs, to get it back. If you can’t do this, the creditor may sell the car. If you see default approaching, you may be better off selling the car yourself and paying off the debt: You’ll avoid the added costs of repossession and a negative entry on your credit report.
If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Most lenders are willing to work with you if they believe you’re acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time. When you resume regular payments, though, you may have to pay an additional amount toward the past due total. Other lenders may agree to change the terms of the mortgage by extending the repayment period to reduce the monthly debt. Ask whether additional fees would be assessed for these changes, and calculate how much they total in the long term.
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Debt Consolidation Could Affect Home Ownership
Debt consolidation can affect buying a home because it could lower your credit score. When you first take out the loan, your credit utilization goes up and your score goes down a bit. If you already own a home and take out a home equity loan or HELOC to consolidate debt, youre putting your home up as collateral, which is not generally a good idea.
The Bottom Line: Study The Facts Before Acting
These are good words of advice for virtually everything in life: study the facts before acting. Consolidating your debt with a personal loan might be the right option for you and it might not be. Dont just jump into it because someone else told you it was a great idea. Do your research. Start with this list and expand your knowledge from there.
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So Where Do I Go From Here
If you are struggling with debt, bankruptcy and credit consolidation are two viable options to consider. A trained credit counsellor can evaluate your financial situation, and help you carefully weigh the pros and cons of each option. Afterward, you can discuss the solution that best fits your position. He or she may also speak to you about debt management or other options as well.
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When Debt Settlement Makes Sense
Debt settlement can be risky and complex. Theres often a better alternative, but if you feel youve exhausted all other options, heres when debt settlement may be an option:
- Youre out of options. If you have less than perfect credit, dont want to apply for any more loans and cant qualify for a lower-interest debt consolidation loan or balance transfer credit card, you might consider debt settlement.
- You dont want to declare bankruptcy. If youre not able to declare bankruptcy or have debts that cant be discharged in bankruptcy, debt settlement might be an option.
- Youre willing to take a hit on your credit report. If your debts have become so unmanageable and stressful that you are willing to risk taking a hit on your credit report due to delinquency, you could pursue debt settlement.
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Cons For Debt Consolidation
The cons to debt consolidation are just as obvious:
- The debt is not forgiven or even reduced. You still owe the same amount of money and if you dont d decrease your spending the problem will never go away.
- Getting an effective debt consolidation requires a good credit score. If you have a poor credit score, you might be denied a debt consolidation loan, or the interest rate on the loan might be the same as the interest rate on your credit cards.
- Time can also be an issue. You should be prepared to spend anywhere from 25 years in a debt consolidation program before eliminating the debt.
Con: You Could Lose Your Property And Assets
With a Chapter 7 bankruptcy, any asset that can be turned into cash will be used to pay off your debt. Only exempt assets, which are determined by your states laws, would be protected from being sold.
If you prefer holding onto your assets, such as saving your home from foreclosure, you might elect for a Chapter 13 bankruptcy. But youd want to consult a credit counselor or bankruptcy lawyer to review your options.
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Other Ways To Consolidate Debt
Although a debt consolidation loan or program can be helpful under the right circumstances, either solution can have a significant impact on your finances and force you to take on a debt youre not comfortable with. If thats the case, dont worry, there are a few less drastic ways to consolidate your debts, such as:
- Personal Line of Credit Similar to a credit card, a line of credit involves a revolving credit limit that you can apply for through your financial institution and use to repay your debts. However, you will likely be given a special new card that you can use to conduct transactions. Be careful, as your lender may ask for collateral and you could lose your asset if you miss too many payments.
- Home Equity Line of Credit a HELOC allows you to take out a line of credit against the equity in your home. While this can be risky as well , you can potentially access a much larger credit limit and longer repayment term if you have at least 20% equity.
- Some credit card providers will permit you to transfer multiple debts onto a single credit card with a lower interest rate, which can save you money and stress. That said, some hefty transfer fees and other drawbacks may apply to your particular card, so remember to get all the information you need from your provider before applying.
Pro: You Could Score A Lower Interest Rate
Say you have credit card debt with an APR of 15.00%. With a personal loan, you could find an even lower rate if you qualify, or have a cosigner who does. These vetted personal loan lenders, for example, offer rates starting well below 10.00%.
That said, be on the lookout for origination fees from personal loan companies. When shopping around, compare APRs because they include both the interest rate and the origination fee, if there is one.
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