Debt settlement –
What is the fuss all about?
Many fail to see that debt consolidation and debt settlement are two very different processes. Debt settlement is concerned mainly with the outstanding debt amount and debt consolidation is concerned with the interest rate on the debt. In order to get out of debt successfully, it is important for you to understand the difference between these two debt relief options. However, in addition to having a proper understanding of the difference between the two, it would also be required of you to practice some control over the debt amount from increasing. Otherwise, leading a debt free life won’t even be a possibility for you.
Debt consolidation and debt settlement
Debt consolidation is the process through which you can get the interest rate on the debt lowered. In addition, the number of payments you will be required to make gets reduced to one. That is because, just as the name suggests the debts you owe gets rolled over into a large but single debt. So, it is a single payment you are required to make every month, after consolidation.
Therefore, managing the payments against your consolidated liability becomes easier.
Debt settlement is the process through which you can get to reduce the outstanding amount owed by you. So, you are required to pay down an amount either in lump sum or in installments against the settled debt. The other part of your liability gets forgiven.
Paying down the debt becomes easier with settlement.
Other differences in between the two options:
Some of the common differences in between consolidation and settlement are as follows:
1. Consolidation does not require you to miss payments whereas in case of settlement you will have to miss payments to make the creditors agree to your request.
2.Consolidation helps to improve the credit and the score too but settlement has an instant negative effect on your credit.
There are a few other things which you need to consider before opting for consolidation. These are:
1.You cannot take out a consolidation loan in case you have bad credit rating
2.Bad credit consolidation is possible but the rate of interest charged would be high
3.You can hurt your credit through consolidation
4.You should never miss payments after consolidation
You must be wondering as to how consolidation is going to hurt your credit. It is commonly known that debt consolidation helps with improving the credit. However, the main problem is that it is considered better to close down accounts if not in use. When you consolidate debts, all the other accounts are left with zero balance and most remain unused. Therefore, it is deemed better to close down the accounts.
Unfortunately this has a negative effect on your credit. That is because, when you close down the accounts it results in sudden loss of your total credit. That again shows you are making high credit usage in comparison to the amount available. This has a negative effect on your credit.
So, you can see that it is important to tread the path to debt freedom as cautiously as possible.
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