When you’re facing several thousand dollars of debt on top of harassing phone calls, bright pink mail, and nail-biting suspense, it is understandably easy to get roped into something like debt settlement
. If you don’t have any assets to secure a loan, debt settlement can be the best option for you, but it certainly shouldn’t be something you walk into without being properly informed.
However, debt settlement and debt consolidation
are two very different animals. Debt consolidation is a better option by far, but unscrupulous agencies often try to blur the defining line; confusing consumers and, in most cases, ruining any shot they had at a better path to financial freedom. Of course, it doesn’t help that the names are large globs of meaningless letters to most consumers, masking the purpose of each process and shrouding the whole idea of debt relief in a veil of mystery.
Video: How to Settle Your Credit Card Debt on Your Own
Settling for a Terrible Solution
Although debt settlement will decrease your overall debt
owed, often by as much as 50% to 70% or more, it is definitely the black sheep of the debt relief family. Debt settlement agencies
advise their clients to stop making all payments until they are done negotiating with your creditors
, which can take quite a few months, or longer. This can add up to several 60, 90 and 180-day late payments, which takes a hefty toll on your score.
You may also have to deal with write-offs on top of the big black hole left by the simple fact you went through a debt settlement agency, which really doesn’t sit well with future creditors. Even worse, the IRS sees the chunk of debt shaved off by settlement as income, and your state may want their share of this “income” too. Nevertheless, if you can’t qualify for a debt consolidation solution, debt settlement will make your debt easier to manage.
Video: Beware of Debt Consolidation Companies - Potential Pitfalls
The Truth About Debt Consolidation
It is so unfortunate many consumers think they are getting debt consolidation and end up with debt settlement - it is definitely easy to confuse the two if you look no deeper than the surface. While debt settlement decreases your overall debt owed, debt consolidation takes all of your debt and moves it into one low-interest loan. Essentially you end up with the same thing - smaller payments - but the effects on your credit are vastly different. In most cases, consumers use their home or other valuable asset to secure the debt consolidation loan.
Secured loans have a lower interest rate than unsecured loans
, often 10% or lower. Compared to your credit cards which usually run about 18% to 39%, on just $1,000 the difference in rate would save you at least $80 a year. Furthermore, any interest on loans secured by a primary residence are tax deductible, and so long as you make the payments on time, your credit score will increase. Now that you know, it’s up to you to make sure you get the best option for debt relief.
