Carrying a load of debt on your shoulders certainly makes life more challenging. In some cases, the stress can begin to affect your mental and physical health. Fortunately, there are several options for putting that burdensome debt behind you. Two of the most popular ways are debt consolidation and debt settlement.
Why Choose Debt Consolidation?
One of the most popular ways to consolidate debts is through a debt consolidation loan. First, you apply for a loan to cover the amount you owe on your existing debts. If you’re approved, you use those funds to pay off your debt balances. You then pay down the new loan over time, usually at a lower monthly payment and interest rate.
You can also consolidate your debts with a balance transfer. This involves transferring your credit card balances to a new or existing credit card with a lower interest rate. Cardholders tend to look for and jump on promotional 0% introductory rate offers. By lowering the interest rate, the amount you’ll pay in the long term also decreases.
Keep in mind that you will likely need good or excellent credit to qualify for a credit card. In addition, you may have to pay fees when transferring your balances and the interest rate will skyrocket after the introductory period.
Cons of Debt Consolidation
The biggest problem with debt consolidation is that it does not actually reduce your debt. Let’s say you owe $20,000 to four different credit card companies and take out a loan to pay them off. You would still owe the $20,000—you just owe it to a different lender. But keep in mind that you could save on interest with a lower rate.
A debt consolidation loan may also cost you more money over its lifetime. For example, if you were to take out a 7-year debt consolidation loan at 6% to pay off that $20,000, you would end up paying $4,542 in interest charges.
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Why Choose Debt Settlement?
Debt settlement does reduce the amount of money you owe on unsecured debts and enables you to pay it off quicker. In addition, you could have a much more affordable payment plan and avoid declaring bankruptcy. As a result of working with a debt settlement company, they usually also try to relieve you from those pesky calls from debt collectors since they deal directly with your creditors.
Cons of Debt Settlement
One of the biggest cons of debt settlement is that it’s not for everyone. You must be able to pay a lump sum of money or fixed multi-month payments to settle each debt. Credible debt settlement providers such as National Debt Relief require you to make monthly deposits into a savings account under your name.
In addition, you’ll be charged a fee typically ranging from 15% to 25% of the amount of debt enrolled in the program, but only after a settlement is reached and at least one payment is made to the creditor towards that settlement. Even when you add in this fee, the total amount you’ll pay is typically lower than the original debt. Keep in mind that a legitimate debt relief company will NEVER require upfront fees – it’s unethical and illegal.
Debt settlement can also have a negative effect on your credit score. Its impact typically depends on factors like the amount of debt owed. Debt settlement can stay on your report for seven years and your score could drop by over 100 points. This could easily lower you from an “average or OK” score to a “low” or even a “poor” credit score. But if you continue carrying the debt, your score could drop even lower.
Why People Choose Professional Debt Settlement
While it’s certainly possible to reduce the debt yourself, most people choose to hire a professional debt settlement company for two good reasons.
Firstly, many people are somewhat leery about trying to negotiate with their creditors or simply don’t consider themselves to be good negotiators. If you qualify for their program, a credible debt relief company can help reduce your balance by having debt experts negotiate on your behalf. In the end, you could end up paying significantly less than you owe.
Secondly, it can be extremely difficult to negotiate a settlement unless you have the money in hand to make an immediate cash payment to the creditor. For example, if you can negotiate a $5,000 debt down to $2,500, you would immediately need to send the creditor that reduced amount in the form of a check or wire transfer unless you negotiate term payments.
Making the Right Decision
Whether you choose debt settlement or a debt consolidation loan depends on a lot of factors, including your financial situation and personal preference. Would you like to free yourself from debt in four years or less, or would you rather take longer to pay off your debt, which will reduce your monthly payments?
There are many questions to consider before you can determine the best choice for your unique financial situation. A professional debt relief company like National Debt Relief can help you choose the option that’s right for you and support you every step of the way.
National Debt Relief
National Debt Relief is one of the largest and best-rated debt settlement companies in the country. In addition to providing excellent, 5-star services to our clients, we also focus on educating consumers across America on how to best manage their money. Our posts cover topics around personal finance, saving tips, and much more. We’ve served thousands of clients, settled over $1 billion in consumer debt, and our services have been featured on sites like NerdWallet, Mashable, HuffPost, and Glamour.