Both debt consolidation and debt settlement have its own signature end results. It is these possible results of the two that you should know so that you can make an informed decision and choose the best option between debt consolidation and debt settlement.
Debt consolidation is very useful and helps people struggling with multiple debts to get their financial situation back on track. The other features of debt consolidation are:
- It reduces the number of loans but does not reduce the total amount of loan outstanding.
- It reduces the total monthly payment amount due to its lower interest rate.
- It may have a longer tenure as well depending on the type of loan you wish to take.
- You have different options to choose from such as an unsecured personal loan or a secured home equity loan if the conditions permit you.
- Two of the major debt consolidation methods are namely a personal loan and a balance transfer credit card.
- The entire process of debt consolidation is very simple wherein you apply for the specific type of debt consolidation loan.
This is supposed to be the most effective and realistic way to pay off your debt. As you do not have to deal with multiple creditors any more, this seems to be a good deal, at least on paper.
However, there is no reason to get over excited about consolidating your debts. This is because the scenario sketched out above may be ideal but it is certainly not guaranteed. To make debt consolidation work best for you, everything has to work out well and in your favor.
However, there are plenty of different outcomes possible when you consider consolidating your loans. To understand this point, you will need to look deeper into the matter.
- First, you will need to realize that debt consolidation is not a solution to your debt problems as in it or by itself.
- This is just a tool that will help you to manage and handle your finance in a more effective and better way.
- It will give you some breathing room with its lower monthly payments as well as providing you with some extra money to add on to your monthly payments.
- It will not affect your credit score or credit history in an adverse manner.
All these outcomes largely depend on the present circumstances you are in as well as the way in which you use this tool and certainly not on the presence of the tool by itself.
As for debt settlement on the other hand, it too has its specific features and benefits. If you go through the debt settlement ratings you will find that this is also a very popular option of the people struggling with their debts. The significant features of debt settlement are:
- In this process, you typically deal with one particular loan that you are finding difficult to continue paying every month.
- You talk with your creditor for lowering the outstanding balance amount, or reduce the rate of interest, or waive a few charges and fees and even extend the tenure of the loan.
- You will need to have the proper resources of your own well-planned and calculated beforehand so that you can keep up with your promised repayment schedule should the creditor agrees to make any amendments.
- The most significant as well as differentiating feature of debt settlement is that it will affect your FICO score in a negative manner. The fact that your loan amount is reduced is detrimental for your credit. It will affect your loan eligibility criteria and quotient in the future.
Considering the features of both, debt settlement and debt consolidation and weighing it, you may find that opting for a debt consolidation loan is more sensible, prudent and feasible. However, the final results of debt consolidation, as well as debt settlement, will entirely depend on the person.
The possible outcomes
If you opt for debt consolidation, then these are the five possible outcomes of it. Know these well so that you know for sure what you are getting into.
- Your application is denied: Well, this happens most of the time and if it happens to you then your dreams of having a better financial future will end abruptly. Usually, an application for debt consolidation can be denied if you have bad credit. If your credit score is low then the creditor will look for the history of missed debt payments. If you are too great a risk to lend, it will leave you in the same place. However, if you have bad credit, turn towards specific lenders who specialize in offering loans against bad credit. Expect terms and conditions that will be less friendly though.
- Consolidate a portion: When you consolidate debts you will not be able to include all your debts in it but a portion of your entire outstanding balance. You may not get approval for a large amount as a loan that is enough to consolidate all your large sums at once. In this situation, you will have to formulate a plan to figure out what to include and what to exclude. Consider including the loans that are costing you more money. Always follow the proper budget for this. You may consider taking out more than one consolidation loan if situations needs and circumstances permit.
- Scammed: There is also a high chance of being scammed with so many debt consolidation companies out there and none being created equally. Tall promises and alluring ads will be made but if you are perceptive, you will be able to avoid these scams. Therefore, without being persuasive, research before you select a company. Charging service fees after completion of the work, transparency, accountability, proper paperwork, accreditation, reliability and reputation in the market are a few factors to check for choosing the right company.
Most importantly, debt consolidation may not provide the desired outcome if you are not considerate. You should not fall back to your bad habit of impulsive buying and stick to the plan you will hardly succeed in becoming debt free.