Do you need a debt consolidation loan when going for debt settlement options?

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You must have heard a lot about debt settlement that many people often talk in the same breath with debt consolidation. Many people feel these two are the two sides of the same coin. Well, if debt relief is the coin you are talking about, then the analogy might hold good because both methods provide relief to debtors. However, the similarity ends there, and after that, debt settlement and debt consolidation are as much different as chalk and cheese.  Which method of debt relief would be appropriate for you depends on your financial position that only debt relief experts like the ones you find at can analyze and advice. Although the processes of debt relief might appear quite easy to understand and might encourage you to do it yourself, it is surely not as easy to implement.

Good understanding of personal finance and the solutions about debt relief is necessary to choose the most appropriate debt relief solution. Every debtor is unique, and the situations that debtors have to face in debt management are unique too. There can never be one size fits all solution in managing debts. While for some debtors, debt settlement might be the only way out, for others debt consolidation could be a better alternative.  It all depends on your present financial status, future financial goals, income, expenditure; liabilities, etc. that create complex design of numbers that point to the possible solutions. Only the experts can figure out what the solutions are, choose one that would work for you and show the way for getting out of debts. In this article, we will discuss debt settlement and debt consolidation to help you understand the processes better.


Debt settlement

When debts load on you heavily, and you find it difficult to make the monthly payments, it is a sign that you must have a close look at it to decide whether you should carry on with debts. Now the question that arises is what you could do if you find that the loan is too much of burden for you. Since it is a loan, you have to pay it back, come what may.  Consider the financial constraints you face which prevents you from making regular payments and try to understand whether you could recover from it after some time to keep continuing with it. Consider the funds you have and how best to use it for paying off debts. If insufficient funds are your problem, then paying back the loan in one go is the best solution and this is what debt settlement is all about. However, the debt relief method hurts your credit scores for quite some time.


The process

Talk to the debtors, explain your financial difficulties and convince them to accept an early settlement. Since you have limited funds, you must aim at settling the loan for an amount less than what you owe. The task is not easy because you have to convince debtors to accept settlement first and then prevail upon them to make them agree for accepting an amount that is lower than the actual repayment figure on that date.  Hiring the services of a debt settlement company is the best option to implement the plan. The experts of the debt settlement company would take two clear actions. They would paint a grim picture of your financial condition to creditors so that convincing them for settlement becomes easy. Secondly, they would also create a corpus of a fund that they would display to creditors to win their trust in making payment on time.


Choosing between the devil and the deep sea

Stopping payments to creditors is the first move that signals financial difficulties of the debtor so that creditors feel interested in recovering the loan instead of having to forgo it completely.   It creates a sense of desperation among creditors that facilitates negotiation for settling the loan for a lesser amount. That something is better than nothing is what drives creditors towards settlement. It is a better option than selling the debtors account to collectors or allowing debtors to file for bankruptcy. The settlement although usually happens with the creditors, collectors or debt buyers are often interested in debt settlement.


Debt consolidation

Unlike debt settlement, debt consolidation is easy to implement because it does not entail hard bargaining and tough negotiations with creditors.  The literal meaning of the phrase debt consolidation bears enough hints about the process. In simple words, instead of putting the eggs in several baskets, you put all eggs in one basket.  When you face too many lenders and maintain several loan accounts, managing these become a problem. An easy way to resolve the problem is to reduce the number of lenders and bring it down to one. For doing it, you have to arrange for funds to pay back all creditors, and the fund could come from a new loan that you have to take.  Effectively, you carry on with the loan, but a single one instead of many. This arrangement does not do away with loan altogether like in debt settlement.


Debt consolidation loan

The loan you take for paying back creditors is special because you can use it for consolidating loans only and known as debt consolidation loan. The debt management company you appoint to handle the debt consolidation project helps to obtain the loan by tapping their network of lenders who exclusively cater to the business of debt consolidation. When availing the new loan, you can negotiate for lower interest rates than what you currently pay so that the total payback, as well as the monthly payments, are less. In the process, you generate some saving which no other debt management programs can offer. Although your credit score encounters a temporary setback when you take the new loan, you can recover from it quickly by making regular payments. By consolidating debts, you get an opportunity of improving your credit score.

The ground realities and your financial position and goals would influence the choice of debt relief.





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