Financial strategies, debt settlement and debt consolidation have the same goal. Both help consumers find a way out of their credit card debt, but both have different routes and systems to achieve their goals.
While the first one helps in cutting down the number of debts at the initial level, the latter is effective in lowering the number of creditors. If your financial condition is already damaged and you fail to pay off the student loan, opting for a credit builder loan is a good idea as it will help you get a small amount of money in case of emergency.
In case, you have taken a considerable amount as a student loan and thinking about whether to opt for debt settlement or debt consolidation, go through the content to know how both of them work and their pros and cons.
What Is Debt Settlement?
It is negotiating with money lenders for settling a debt for less than what is due. This method is used to settle a substantial debt with only one creditor. But the practice is also be used with many money lenders.
How Does Debt Settlement Work?
Debt settlement is only possible when you have a lump sum of money from somewhere. The source could be anything like a loan or a will or informal loans from family members or relatives.
To have a successful negotiation with the moneylenders; the following things should be demonstrated.
- Cannot keep up with the debt repayments and, even in the future financial state would remain the same.
- Have a large amount but still cannot keep it without using it for daily essentials.
Once the negotiations are completed, make sure that the moneylender approves in a written format.
Calculate your debt settlement money so that you can make a sensible deal with your creditors. You figure out the following.
- How much amount is owed, to each money lender separately.
- The total size of the current money you have.
- Divide the amount by the debt amount and understand how much money is affordable to pay.
Once the offer gets to the creditors, they can decide to accept the debt settlement or not. If they do not take the offered deal, you may have to seek other options.
Pros of Debt Settlements
Clearing a proportion of the debts that can become uncontrollable in the future helps you avoid sequestrations (bankruptcy). Moneylenders may force you into bankruptcy, but good debt settlement deals will not let that happen.
Fresh Financial Start
If you can clear one or more debts that have the potential to become unmanageable, then you can have a fresh start in life financially. You might end up saving some money in the process too.
Cons of Debt Settlements
Effect on the Credit File
When a debt is partially repaid after the debt settlement offer is accepted, the moneylender may place a mark on the credit file next to the debt. It would remain on the file for the next six years, which will indicate that the debtor has only paid half the amount.
Needs a Massive Amount of Money
You will need a tremendous amount of cash to repay the settled amount. It could be a redundancy payment such as an inheritance or a windfall like a lottery win.
What Is Debt Consolidation?
It is an effect that combines debts from many money lenders and then takes out one single loan to pay back everyone. It is done by the people who try to keep up with bills of many credit cards and other unsecured debts.
How Does Debt Consolidation Work?
Debt settlement can be tricky; therefore, many people try and not to depend on it entirely. Moneylenders do not like the idea of their debtors having money to clear accounts and not using all of it to pay the debt, whereas for the borrowers, giving away all their windfall profit will not be an option.
Debt consolidation provides you with a considerable amount that can help you repay your money lenders their money. It is like a debt consolidation loan.
Instead of worrying about repaying many money lenders, you only have to worry about repaying only one moneylender, the debt consolidation loan lender. You can control your finances with monthly payments and interest rates.
Pros of Debt Consolidation
You Could Reduce the Interest Rate
Informal loans can have a lower interest rate compared to the other formal sources of loan. In a way, you can save a lot of money if you could verify for debt consolidation.
You Could Lock a Low Rate
When money is borrowed from a source, there could be changes in the interest rate over the loan period. That means the interest rates may go up or down until the loan is repaid. But debt consolidation gives fixed interest rates at your convenience.
You Can Boost Your Credit Scores
Consolation debt loans can help in boosting the credit scores if it is repaid on time.
You Have a Repay Timeline
When a consolation debt is taken, it makes you pay at scheduled times. It also has a timeline of your repayment amounts. Therefore, you can check and know exactly when you will be loan free.
Cons of the Debt Consolidation
May Have to Pay Higher Interest Rates
There is no guarantee that a loan would have lower rates.
May Get Hit With Fees
Sometimes you have to pay to get the loan. Depending on the moneylender and its system, you might have to pay some fees, like arrangement fees, early repayment fees.
Consolidation or Settlement- Which Is Better For a Student Loan
It all depends on your financial situation. Check CreditSpring’s guide to checking your credit report to have a detailed idea about your financial health. If the borrowed amount is manageable, opt for consolidation as you do not have to agree on any terms, can pay every month according to your capacity and decide what to do with the money.
But in case, the loan amount is huge, you cannot pay it off every month, banks or other financial institutions have started to call you for the amount, choose debt settlement. Debt settlement is one and only option to save you from bankruptcy.