Many people confuse debt settlement with debt consolidation. But, you must understand that both these procedures are different from one another. Yes, both of these are effective repayment methods to clear off the debts, but each one comes with its share of uniqueness.
When it comes to debt settlement schemes, the companies involved would focus on negotiating lump-sum amounts, with each of your creditors to settle the existing debts. The amount would definitely be lesser than what you actually owe. This may sound perfect, but there are certain drawbacks associated with debt settlement schemes. Some of the creditors may refuse to simply have any kind of interaction, with the debt settlement companies. At the same time, debt settlement can create a massive negative impact on your overall credit score.
Debt settlement companies usually ask their clients to stop paying for the existing debts. Instead, they need to start sending a monthly check to them (the debt settlement company). This money is deposited into an escrow account. Once the account reaches a certain Dollar Goal, the settlement company would make the offer to the creditors. However, creditors are not bound to accept the offer. Herein, lay the risk of availing the debt settlement schemes. If the creditors do not accept the offer, you would become liable for additional payments, in terms of interests and late fees.
Debt Consolidation is quite similar to debt settlement, yet much different. This scheme primarily involves taking out a single loan to settle all the pending debts. Once you are under the debt consolidation scheme, you are liable to make only a single payment to the credit counseling agency (from whom the single loan is taken for repaying the debts) on a monthly basis. The easy monthly installment option, associated with debt consolidation schemes ensures minimal interest rates to save a lot on the repayment part. But, you need to be careful with the payment part. You must not miss a single payment, or else your credit score would be hampered severely. Debt consolidation reviews are usually positive and better in comparison to the settlement schemes.
The Concept of Debt Consolidation Refinancing
Debt Consolidation Refinancing is a process to include other debts to refinance your home. Say, for example, if you have an existing debt amount of $10,000 on your credit card and you owe near about $80,000 on your home, the best option would be to refinance your home for $90,000 and use that money to carry out a one-time payoff and get your credit card debts cleared. However, you must keep in mind that such an option is valuable, only if you have a suitable equity in your home and you receive a lower interest rate, as well as a monthly payment on the new mortgage.
The most advantageous aspect of debt consolidation loans is the fact that they are non-taxable. There are no interest rates to get deducted on debt consolidation loan schemes unless you put up any kind of collateral like a car or a house.
Author Bio: Chris Gratin is a debt consolidation expert working for a reputed credit counseling firm. He often shares debt consolidation reviews on the latest offerings in different financial blogs and portals.