In case you are down with overwhelming debt, should you opt for a debt consolidation process or a debt settlement deal? To determine what will work the best for you, you need to sit down and weight all your options to take the right choice. Here, you should begin looking at all the options of finance available to you and check your budget. Here again, you need to consider as for whether you wish to have a single payment or multiple payments, a reduced interest rate or a longer repayment duration. In case, the above factors are too much for you to think over, it is prudent to take the counsel and guidance of an experienced lawyer in the field.
Weighing the pros and cons of each- debt consolidation or debt settlement
The first step for you to do is determine whether your loan is eligible or not for debt consolidation or debt settlement. Note that all loans are not eligible for them. Debt settlement will focus on loans that are unsecured by nature like credit card debts. Here, you cannot use debt settlement for the elimination of home or car loans. Debt consolidation is more or less the same except it is a bit more flexible, like, for instance, you may settle student loans with them. Remember that unsecured debt is one that does not have a lien on a specific property like a home or car loans. This debt is an unsecured loan as it does not have collateral. For example, a credit card debt is an unsecured debt; however, a home loan is a secured debt as the equity of the home backs it.
The attempt to consolidate loans can also face certain issues. The terms and conditions of the different loans you have taken might stop them from being merged into a single loan. Besides the above, some specific lenders might offer debt consolidation for your loans above a certain amount. It is wise to be educated in debt relief programs to make informed choices.
Check the interest rates of the new loan that you will be paying
If you are currently undergoing high-interest rates for the loan, it is a smart idea to opt for debt consolidation. Under debt consolidation you are able to get a high overall balance; however this, in turn, will help you to negotiate and settle for a reduced interest rate. This is one of the salient benefits of debt consolidation for your loan. It helps you to pay towards the balance due directly reducing the whole costs of the loan. When you are looking for a consolidated debt loan, choose a fixed rate. If you opt for a variable rate of interest, you start with a reduced interest rate; however, it will increase over time.
Consider the amount of taxes you need to pay
Esteemed name in the field of debt relief programs, https://www.nationaldebtreliefprograms.com/ says you should take into consideration the tax impact on debt settlement. Note that if you save any money with debt settlement, this sum will be considered income when you file your income tax. The creditors will report the above to the IRS. On the contrary, debt consolidation agreements will not influence your taxes allowing you a less rate of interest deduction during the end of the year. In case you have concerns and doubts regarding the impact of debt settlement or debt consolidation on your taxes, you should talk with a qualified CPA or tax consultant before you enter into any agreements for debt relief.
Impact on your credit score – debt consolidation vs. debt settlement
Debt consolidation will show you a larger amount owed on your credit report. However, if you can make all the payments on time, this will not affect the final report. Note that debt settlement reduces credit score in the short term; however, the benefits of the above are you can make new payments consistently, or you can pay off the whole debt completely.
Check if you have funds for small payouts
In case, you cannot pay off debt settlement in a single lump sum, you may agree to pay them off in monthly installments with some fees attached. This increases the whole amount that you need to pay. However, with debt consolidation, you might need to pay fees first, but you do not have to pay fees with each payment.
Enjoy the benefits of a single payment
In case you have lagged in debt payments as there were so many of them to keep up with, opting for debt consolidation is a wise and prudent choice. You no longer have to deal with several payments and many companies. Now, you have one single payment and can service your loans through them. With debt settlement, you are able to reduce payments, but this works when you agree to pay a lump sum to terminate the loan.
Requirements for collateral
In the case of debt consolidation, you might be asked to provide some security unless you have perfect credit. This, in turn, will make the final loan a secured one. You may use your car or house as collateral. Note that in case you fail to make the new payments as agreed by both of you, the lender can seize them. In the case of debt settlement, no new loan is created- this means you do not have to worry about the property or your car getting seized by the lender.
Last but not least, you should consider the repayment period. You will be given a reduced rate of interest; however, your debt consolidation loan will have a longer duration. This means you will be paying longer over a period of time to cover the new loan– this implies you might end up paying more despite having a low-interest rate. In the case of debt settlement, you make one lump sum payment, and the loan is terminated entirely. There is no scope of you paying more in the long run!