Every one has confusion between Debt Consolidation and Debt Settlement. Is there any difference? One is to reduce creditors and the other is to reduce debt! Read the further explanation below:
Debt consolidation and debt settlement are both financial strategies that can be used for the improvement of your personal debt load, but their function is quite different from each other and is used to resolve different issues altogether. In a simple description, we can say that debt settlement is useful for reducing the total amount of debt you owed, while debt consolidation is useful for reducing the total number of creditors you owe. Although it is possible that you receive secondary benefits through either of the two strategies, particularly the debt consolidation.
What we are saying is this:
Debt consolidation and debt settlement help you to reduce your debt load, but only that they do so in different ways and by using different strategies.
Debt settlement is helpful in cutting your total debt owed, while debt consolidation on the other hand is useful for cutting the total number of creditors you owe.
With debt consolidation, multiple loans are all rolled into a new consolidation loan that has only just one monthly interest rate.
With debt settlement, you as the debtor or a credit counselor go out to negotiate with your creditors so that you can pay a lower amount than what you owe, but often time this is allowed in a lump-sum settlement.
Debt consolidation and Debt settlement
This means you consolidate your debts by a consolidation loan, which is a single loan that combines and replaces all of your earlier debts into just one monthly payment with one interest rate attached. Consolidation loans are offered through financial institutions like banks or credit unions—and all of your debt payments are made to the new lender.
For some people, the psychosomatic benefits of having a simplified plus consistent monthly payment are enough to warrant a debt-consolidation strategy. In some instances, a consolidation loan might result in a lower total monthly payment or a lower average interest rate on your debt. Unfortunately, the extended repayment terms can often offset these savings, so you need to be sure to consider the long-term costs of consolidation loans.
Most of the consolidation loans are secured with one of your assets, such as your home, car, retirement account, or insurance policy all depend. You are advised to accept a secured consolidation loan if only you are comfortable with putting up considerable collateral but if not don’t.
The debt settlement method does not seek to replace existing debt with a new loan, but instead, debt settlement is a series of negotiations between your creditors and you or sometimes a credit counselor in which you seek to reach an agreement that allows you to pay less than you currently debt owed and usually work in a lump-sum payment.
Know that your creditors are not under obligation to enter negotiations or accept your offer. Nevertheless, it is often possible to pay much less than you currently owe if the creditor believes your offer represents its best chance to recoup at least a part of the loan. Advanced debt-collection techniques and the accounts-receivable processes are expensive, and fighting through a bankruptcy proceeding is also unattractive to most lenders.
Reaching a Settlement Requires Negotiation
This kind of process is not usually completed after one round of communication. In fact, stretching out the debt-settlement process is a usual strategy to force a creditor’s hand.
Settled debt is gone and wiped clean. However, with unsecured debts such as credit cards, you risk having your account closed completely after the settlement is made because the lender will not want to continue to grant you any credit anymore.
For a better understanding of the difference between debt consolidation and debt settlement, I advise that you contact the Federal Trade Commission (FTC) or the National Consumer Law Center for free information on debt negotiation and debt negotiators as well.