There are differences between settling a debt and consolidating debt. The two systems come with their own pros and cons, although the target result is about debt management and solution to difficult loan repayment. Yet results vary upon the choice of the method. Hence before you take up one of them, you need to think which one would be the best fit as per your financial situation.
When is debt settlement a good choice?
If you are struggling to pay the installments for the loans and you need time to arrange money, and at the moment you have no funds to pay anything then you may be a candidate for debt settlement. It may be the situation that you are short of funds to pay all of your loans, or you are almost handling most of the expenses and debts except one or two huge amount EMIs for big loans.
In such a scenario, you have nothing to pay and are not sure of when you will have funds. Then you may really wait for a long time and a few months to get things negotiated, while you arrange to gather or earn some funds to pay off. A case of settlement runs long, and it takes time to negotiate however reputed your settlement agent or company is and how high their debt settlement ratings are. And you will not have the exact date and time of when things will be settled. It may take one year or three, and you will have to wait, even after hiring the best settlement negotiating company after intensive study reviews. In short waiting for an indefinite time range of up to a max of 4 years, in general, is anticipated.
But the advantage of waiting is that you will have the time to earn or gather funds, so that when things are settled finally, then you have that money to pay and get off the debt. And this is how debt settlement can be of special value and relief to you when you don’t have fund arranged at present to pay.
Problems you would face with debt settlement
One of the main problems with debt settlement attempts which you face is that your credit rating becomes the victim. The credit record gets smashed due to the constant monthly impact it receives from nonpayment of the EMIs of the one or several loans that you are running.
This happens because, when your settlement issue is handed over to a settlement company, the first thing they do is ask you to stop paying a single penny to the creditor. You are asked to pay nothing at all, and this nonpayment challenges the creditor to sit in the discussion and get into the negotiation initiated on behalf of you by the settlement company. And while you pay nothing, the dues and penalties on those dues keeps on building and piling up.
By the time the debt is settled in some months or years, the dues become huge, and the several months of non-payment reflect pathetically on your credit history and records. Hence, as per the feedback received from numerous settled clients, it has been admitted that, although you finally pay a much lower amount than you actually owed, you get your records dampened by the efforts and process.
When is debt consolidation an option for you?
First of all, debt consolidation is the option for you only when you have multiple debts. Many debtors realize that they can pay an amount for their debt payment by squeezing or managing some part from their monthly earnings, but that affordable amount is much lower than what they are paying at present. Also, many debtors realize that they are getting paranoid and confused in keeping track of their multiple loan accounts and the different EMI payment dates, and it gets difficult to keep funds arranged all the time on all those dates of the month to pay. In such situation, one may often miss a payment, forget dates, wrongly allocate funds and do such things which affect the credit rating. Missing each payment accumulates that due and penalty in the account while the credit rating gets lowered with it.
Debt consolidation can be a big relief for such cases. You will have to calculate the exact amount which you would need to settle all your debts everywhere, and then apply for that loan amount to a lender who gives debt consolidation loans. When your loan is approved, and you get the money, then you may pay off all the dues everywhere and close all old debts. Now you just have to pay one EMI for the new consolidated loan you took where the rate of interest would be much lower than you paid earlier to several lenders. Also, your tenure of payment will be longer resulting in an easily manageable low amount EMIs that can be paid monthly without stressing your month’s budget.
This is a much easy way to manage debts, guard your credit rating, and avoid litigations and legal problems and settle in peace. But you must have at least the arrangement to pay the EMIs for the new debt consolidation loan you are taking, or else all these efforts would go to vain, and you will again be stuck in debt and will be affecting your credit rating.
But if you can pay it well, every month, religiously through the tenure, then you will actually be making your profile stronger for future financial steps, and will also improve your credit history and score.
Finally- taking the decision
If you have to choose between the two, debt settlement and debt consolidation, then you must see a few things which are:
Upon evaluating your situation based on that you can take a well-thought step.