By David Pilley on October 20, 2011
.jpg.aspx?width=75&height=75) If you ever come across the situation of picking between debt settlement and debt consolidation, it is necessary to know the difference. With a financial situation, someone may try to give you faulty information, and this could result in a bigger debt issue. Before deciding on one or the other, you need to know the components of each as well as the optimal time to pursue either option.
With debt consolidation, you are moving all of your unsecured credit card debts into one account. In essence, you’re taking out a new loan to take care of all your loans. The reasons to consolidate your debt may include getting a lower interest rate, getting a fixed interest rate, or simply having to keep track of just one amount to pay each month. A debt consolidation loan will typically be a secured loan. Getting an unsecured loan will be difficult and the interest rate might not be much lower than the ones on your current credit cards, so getting a secured consolidation loan will assure you of a lower rate. Having it secured means some sort of property, such as your house or vehicle, will be used as collateral in the situation of default. I would suggest you use your vehicle as collateral; it is much easier to live without a car than without a home!
With debt settlement, you are actually negotiating a lower amount of debt to pay, rather than just focusing on the interest rate. Debt settlement involves a large amount of money, as companies typically will not consider it unless you have at least $7,500 of unsecured debt. This will be most likely if you have been late with multiple monthly payments, so don’t even consider settlement if you have missed just one month. With a debt settlement company, you always want to check the Better Business Bureau first to see if there have been any consumer complaints.
Debt consolidation may lower your monthly payments, while reducing your interest rate and making it a fixed rate. However, the term of the repayment plan may end up being so long that you actually pay a higher amount in interest than you would have with your credit cards. With a debt consolidation payment plan, make sure that you can make more than the minimum payment every now and then. Debt settlement will lower the total amount you have to pay to your creditors, but make sure you have a copy of the plan before making any payments onto it. If it is a lump-sum payment, make sure you have the money when it is due. If it is a monthly payment plan, never miss a payment! If the amount forgiven from your debt (the amount you now don’t have to pay) is more than $600, be aware that this portion may be considered “income,” and you may be taxed on it. Finally, be aware that a settlement may lower your credit score until the settled amount is paid in full.
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