Debt consolidation vs. debt settlement: What’s the difference?

If you owe multiple creditors, debt can keep your awake at night. Obligations such as credit card debt, medical bills, and loans can make it difficult to stay on top of your monthly payments. A personal loan is a great option to help you pay down your debts by consolidating them — also called debt consolidationnow suggests.

Consolidating debt is actually one of the reasons that personal loans are most popular. While this is a sound option, it can be confusing if you’re looking for ways of paying down your balances.

Credible allows you to compare rates from different lenders whenever you are thinking of taking out a personal mortgage. Credible is able to help you get a lower rate of interest and calculate your monthly payments.

Although the terms may sound identical, there are many differences between debt settlement or consolidation that could impact your credit score. You should understand and read the fine print to ensure you don’t get in financial trouble.

Debt consolidation

Consolidating debt requires that you obtain a loan through a bank credit union or online lender. Once you have the loan, you will use the funds to repay your outstanding debt. Instead of making payments for various creditors you’ll send one to your lender.

One of the major benefits of using a personal lender to consolidate your debt is the possibility of getting a lower interest. According to Federal Reserve, an average personal loan interest is 9.65%. This is lower that the average credit-card interest rate which is 14.65%.

Credible will help you find the best personal loan options for you and compare rates with lenders.

Debt resolution

It’s possible to settle debt on your own. However, it’s best to hire a company that will contact your creditors and try to negotiate a reduced lump-sum payment. Once the debt is paid off, these companies charge between 15-25% and 25%.

You must stop making payments for a minimum of 90 days before negotiations can begin. This will affect your credit and FICO rating. The interest and late fees keep increasing. During this period you should expect to receive threatening telephone calls and letters from creditors.

Most debt settlement companies require regular transfers to an account in order to accumulate sufficient settlement funds. The administrator will usually charge a fee to manage the account.

Your creditors might accept a reduced amount of your debt. However, it’s unlikely that they will agree to a larger lump-sum payment. Because of penalties and interest, your debt could increase to a lot more than it was when it started. If your debt is resolved, the Internal Revenue Service considers any amount you are forgiven income. It is therefore taxable.

Lee J. Murillo

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