Debt Consolidation vs. Debt Settlement: What’s the Difference?

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You should understand the differences between debt consolidation and debt settlement if you’re considering these options. (iStock).

When you have multiple creditors, debt can keep you awake at night. It can be hard to manage your monthly payment if you have outstanding loans, credit card debts, or medical bills. A personal loan is a way to consolidate your debts, also called debt consolidation.

Consolidating debt is one of the main reasons that borrowers take out personal loans. While it is a viable option, it can be confusing for debt consolidation and debt settlement when you are looking for ways to pay your balances.

Credible is a great website to help you compare rates and find the best personal loan. Credible can help to get a lower interest rate and estimate your monthly payments.

Debt Consolidation or Debt Settlement? What’s the difference?

Although these terms sound very similar, there are important differences between debt consolidation or debt settlement that could impact your credit score. To avoid financial difficulties, make sure you read and fully understand the terms of each other’s agreements.

Consolidation of Debt

You get a loan from a bank or credit union to consolidate your debt. The funds are used to repay as much of your existing debt as you can. Instead of paying multiple creditors, you will instead make one payment to your lender.

A personal loan to consolidate debt is a great option because you get a lower interest rate. According to the Federal Reserve, personal loans have an average interest rate of 9.65%. This is lower than credit cards’ average rate of 14.65%.

Credible is a website that allows you to compare rates and lenders and explore personal loan options.

You may lower the interest rate so your monthly payments are lower and you have more money in your bank account. This lower rate allows you to keep the same amount of fees and pay off your debt quicker.

Credible’s loan calculator will help you determine how much a loan might cost. Credible also offers free online tools that can help you calculate the cost of a loan. These include a rate table to help you find a lender who suits your financial needs.

Debt settlement

You can do it yourself, but debt resolution involves hiring a third-party company to contact your creditors and negotiate a lower lump-sum payment for you. These companies will charge you between 15% and 25% of what is owed once the settled debt.

You must stop making payments for at most 90 days before trading can occur. This will cause credit and FICO scores to be negatively affected. Late fees and interest are on the rise. This is when creditors can threaten you with threatening letters or phone calls.

Most debt settlement companies require you to transfer money regularly to an escrow account until you have reached a sufficient settlement amount. This account is managed by an independent administrator who will most likely charge a fee.

Although it is possible to reduce your debt, creditors may not accept a lower lump sum payment. You could end up owing more than you originally started with because of interest and penalties. The Internal Revenue Service treats the amount forgiven as income, and therefore it is taxable once your debt has been settled.

A personal loan is a more risk-free option. Credible is a great place to learn about debt-relief possibilities and which option would be best for you.

What happens if I choose to settle my debt instead of consolidating?

You should immediately cancel the contract with any debt settlement company if you discover that you have taken out debt settlement instead of debt consolidation.

All funds in escrow are yours, as well accrued interest. Contact your creditors to inform them that you have terminated the agreement and are taking over the debt. Nonprofit credit counselors can also be used to manage your debt.

How can I rebuild my credit?

You will most likely be denied or forced to take a higher interest rate if you have bad credit. It can seem challenging to repair your credit, but it is possible with just a few steps.

  1. Don’t miss any payments and pay your bills on-time
  2. Your credit report should be checked. The Consumer Financial Protection Bureau recommends you review your credit report at least once per year and report any errors that may negatively impact your score.
  3. Keep an eye on your credit utilization rate. It is best to use 30% or less of the credit limit.
  4. A secured credit card is an option. This account will require a cash deposit.

A personal loan is a way to consolidate your debt without dealing with the pitfalls of debt settlement. Get started today.

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