Debt Settlement vs Debt Consolidation |
By Frank Jones on January 1, 2012
.jpg.aspx?width=75&height=75) Debt settlement and debt consolidation are two tools that can be used to reorganize your debts and help you get out of debt. However, there are major differences between these two strategies. Using the wrong one could needlessly reduce your credit score or jeopardize your home. This is why it's important to understand the differences between debt settlement and debt consolidation before choosing which is best for your financial situation.
What is Debt Settlement
Debt settlement is a way to reduce your debt by negotiating with your creditors to reduce your unsecured debt. This includes things like credit cards, utility bills, and medical expenses among others. Since these debts are unsecured, creditors are more willing to accept settlement offer than to risk default by insisting on repayment of the full balance. Some times you can settle these unsecured debts with a single payment of 50% - 60% of the total balance. However, it is important to remember that debt settlement is not the same as paying your debt in full.
When to Consider Debt Settlement
Debt settlement, sometimes called debt negotiation, should be considered when you find yourself with more debt than you can handle and do not see your situation changing for some time. These settlements are reported to your credit score and will lower your overall credit rating. Therefore, debt settlement is somewhere between defaulting on your debt and repaying it in full. It is not a good option to settle your debt if you have the ability to repay your debt or the option to consolidate that debt without too much risk.
What is Debt Consolidation
Debt consolidation is the process of combining your unsecured debts into one lump sum and borrowing against some asset with equity, typically your home. The most common unsecured debts which are often consolidated include credit card bills, utility bills, and medical expenses.This allows you to lower your interest rates and fees in order to repay the debt more easily. The reason for this is that secured loans have lower interest rates than unsecured debts because there is always the option to collect the security asset for nonpayment.
When to Consider Debt Consolidation
Debt consolidation should only be considered when you are sure you will be able to repay the debt and are comfortable risking your home based on this repayment. This type of consolidation is acceptable for people who find themselves in a tough situation but quickly recovering. However, it is a terrible idea when your situation will likely be persistent. In this case, debt settlement may be a better alternative.
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