Debt settlement vs debt consolidation

If you are having trouble paying your loans and making ends meet, and are looking for a solution, then two possible options are debt settlement or debt consolidation.

Both of these options are seen as good alternatives to filling for bankruptcy.

A debt settlement implies a renegotiation and reduction, usually in the form of a partial write-off, of a portion of your debt. The settlement company will negotiate with your creditors and seek a reduction of 40% to 70% in the amount of your outstanding balance.

Along with the reduction in the outstanding loan amount, there is also usually a renegotiation in the payment terms. This can mean a reduction in the interest rate, a change in the repayment period, or a combination of the two.

There is normally a minimum amount of money you must owe to qualify for a debt settlement, usually 7 or 8 thousand dollars.

One of the main disadvantages of a debt settlement is that it is almost as bad as a foreclosure on your credit score. A bad credit score will make it very hard for you to qualify for all types of loans at competitive rates in the future. Something as simple as buying a car after bankruptcy can be difficult if you don´t qualify for a loan.

A debt settlement will entail a write-off than is considered income and will have to be reported as such to the IRS. In certain States you might even have to pay the State income tax.

Debt consolidation doesn´t entail any kind of a reduction in the amount of your outstanding loan. With debt consolidation you get a new loan that lumps together all your other loans into one. Instead of dealing with many different lenders and making payments to all of them, you make only one payment to a single creditor. While there is no reduction in the actual principal amount, you can save lots of money over the life of the loan due to the lower interest rate on the new loan.

A debt consolidation loan will usually have a lower interest rate. This will by itself lower your monthly payment. It is also possible that a consolidation loan have a longer repayment term.

Certain debt consolidation companies will charge you a monthly fee.

Debt consolidation is an ideal solution if you have many high interest type loans, usually credit card loans. Since a consolidation loan usually carries a much lower rate, you stand to save the most.

The interest on one of these loans can also be tax deductible if the consolidation loan is treated as a home equity loan.

Unlike debt settlement, debt consolidation has little or no disadvantages. Unless you count not getting a "discount" on your loan a disadvantage.

A consolidation loan doesn´t reflect badly on your credit score.

Under certain circumstances, you might be required to have a home as collateral for a consolidation loan. A steady employment and a good credit score are also a plus.

Unless you are in a very desperate situation, you should avoid debt settlement and instead try to consolidate your loans in order to make it easier for you to keep up with your obligations. Compare the monthly payments you are making now with the scenario of a consolidation loan before deciding.

Your first option should be a consolidation loan, and only if you are unable to handle the monthly payments should you opt for a loan settlement.

You might also consider a debt settlement if you are at least three months behind on your payments.

If you decide to go with debt settlement, research several debt settlement companies before choosing one. You should also research the company with the Better Business Bureau.

You can also seek help from credit counseling firms to help you decide between debt settlement vs debt consolidation.