The smart way to choose a debt relief plan is to compare them against each other. That is the only way for you to find out which is the best program that will help you get out of debt. To help you compare options, let us concentrate on debt consolidation loans and debt settlement.
Of course, this should come after your careful analysis of your finances. More than any other requirement, this will indicate how much you can actually afford in terms of debt payments. It is one of the key factors that will tell you which of the two is your best option.
When you have this firmly analyzed, there are three factors in choosing a debt relief program: qualifications, payment requirement, and risks. There are more but these are usually the most important.
In terms of qualifications, debt consolidation loans requires more in terms of financial capabilities. This program involves getting a loan with a significant amount that is enough to pay for the remainder of your debts. You want to close off the other accounts so you only have to concentrate on one payment every month. This means you need the following qualifications: steady income and a low debt to income ratio, and a good credit score or a collateral. The first two requirements will check your ability to pay off your debts. The credit score and collateral requirement will help you receive a low interest rate on your loan.
Debt settlement qualifications will not involve any of these. You only need to possess the right debt. There are debts like secured loans that cannot be solved by debt settlement. But if you have unsecured debts, you can opt for this even if you do not have a steady income and your debt to income ratio is very high. The same is true for your credit score.
For the second factor, the payment requirements of debt consolidation loans are similar to that of any other loan. But comparing it to your current debt scenario, this program will provide a more convenient payment scheme. You will only need to send payments to one creditor – the lender of your new loan. You can dedicate your time on growing your payment fund. You can also benefit from a lower monthly payment because the terms are ideally longer. Since the same balance is stretched over a longer time, the payment is smaller every month.
In debt settlement, you initially stop sending payments to your creditor as the settlement company negotiates with them. You will secretly build up your funds and use it as a settlement amount. This amount will be the basis of the negotiation with the creditor. You will convince them that you are in a financial crisis – that is why you need to agree on a lower amount than your credit balance. When you have paid off the agreed amount, the agreement should be the creditor will forgive the rest of what you owe.
Finally, the risks. In debt consolidation loans, a popular risk involves the assumption that you can use your credit cards again since paying them off places them on zero balance. At least this is true if most of your debts are on your cards. Bottom line is, the pitfall in this program is you are not really reducing or solving any debt. You are merely shifting the amount around so the monthly payments are more manageable. But compared to the other debt relief option though, this is more credit score friendly.
Debt settlement will put a huge negative impact on your credit because you will deliberately miss out on payments. Not only that, there is no guarantee that the creditor will agree to your settlement proposal. If this happens, you should not give up but the fact remains that your debts would now be in worse condition than before.
Think about these factors before you decide on the program that you will use. It all boils down to what your personality and finances can afford and sacrifice.