Debt Consolidation Loan vs. Debt Settlement

Key Points: 

• Debt consolidation simplifies your debt payments. Debt settlement, on the other hand, reduces your debt you owe.
• Debt consolidation requires strict financial discipline to ensure you don’t acquire more debt.
• Debt settlement can be a viable solution if you are already struggling financially.

Credit card debt is easy to accumulate. Tempting rewards, the ease of using credit cards, a medical emergency, unexpected home repairs, paying off bills, travel credit cards, or simply a shopping splurge may seem like a convenient idea but soon leave you with an amount of debt that you may find difficult to pay off. If you are like the average credit card holder, you are making minimum monthly payments without realizing that this way you accumulate debt instead of paying it off,

If you are reeling under the burden of debt, you should take action now and explore some of the debt resolution options available to you, such as non-profit credit counseling (involving a debt management plan), debt settlement, bankruptcy, or debt consolidation. 

To learn which of these solutions best suits your situation, contact a ClearOne Certified Debt Specialist at 866-481-1597 to request a personalized debt resolution plan. 

Two of the most popular debt resolution options are debt settlement and debt consolidation. Should you consider debt consolidation or debt settlement? The answer depends on your specific situation.

Let's take a closer look at these potential solutions and compare their pros and cons. 

Debt Consolidation Pros and Cons

Are credit card companies calling you? If you are falling behind on your credit card payments or are already making only minimum payments on several cards, your debt load has overwhelmed you. It is time to consider a debt consolidation loan. What can you hope to achieve by paying off one debt with another? 

What are the pros of debt consolidation loans? 

• By replacing the multitude of high-interest debts you have with a single, low-interest, fixed-rate loan, you simplify your debt equation and make it easier to manage your monthly budget. The best debt consolidation loan relieves you of some debt burden by giving you lower monthly carrying costs and a finite payback period.
• Debt consolidation reduces the number of monthly payments to a number of creditors to one single monthly payment made to a single creditor, making it easier to pay off multiple credit cards.
• A debt consolidation loan only makes sense if it lowers your interest rate. For that, you need an excellent credit score. When you fall behind on credit card payments, your issuer can raise your interest rate, thus making it even more difficult for you to catch up. 
• Debt consolidation allows you to pay off all of your credit cards. Thus, you may be able to improve your credit score. 

Pro tip: Avoid using your credit cards after you secure a debt consolidation loan and pay them off. If you do, you will defeat the purpose of debt consolidation and debt resolution. Try to start up an emergency savings account instead. 

What are the cons of debt consolidation loans?

• A debt consolidation loan will not reduce your debt. You will still have to pay back every penny. Furthermore, if you do not accompany your debt consolidation with a radical spending reduction, you may only compound your debt problem.
• A debt consolidation program will take three to five years to complete. You have to maintain your financial discipline for that time to succeed.
• You cannot get a decent debt consolidation loan with a questionable credit score. If your credit is less than ideal, you should take a close look at debt settlement. 

What Is Debt Settlement

Debt settlement is a financial strategy where a debtor negotiates with creditors to reduce the overall amount due, thus allowing you to pay less on your debt and save money for other uses.

The goal of debt settlement is to convince creditors to accept a payment that is less than the full balance, effectively settling the debt for a lower amount. When a debtor can’t repay a debt in full, it makes sense for lenders to accept a settlement amount even if it’s lower than the overall debt owed.

Debt settlement is a useful tool for individuals facing significant financial hardship who can’t manage their outstanding debt through regular payments. If a debtor can show they can’t realistically repay their full debt, then debt settlement is a good step toward financial freedom.

Debt Settlement Pros and Cons

The least expensive debt resolution method, debt settlement saves you money by convincing creditors to forgive some of the principal amount you owe. Is your debt problem acute enough to have hurt your credit score or threaten you with debt collection or even bankruptcy? Then you should consider debt settlement, as it may be a better option than debt consolidation in your case. 

What are the pros of debt settlement?

• Debt settlement entails no upfront costs. It has been illegal since 2010 for debt settlement companies to accept upfront payments from their clients.
• The savings resulting from debt settlement are often substantial and you may see your bank account balance grow or you may be able to use the savings to cover for some other expense.
• Debt settlement works for many. According to an American Fair Credit Council report, 74 percent of those who enrolled in a debt settlement program settled at least one account.

When you enroll in a debt settlement program, you begin making payments into a savings account where funds begin to accumulate. This sum will be used to settle your debts. Then, the company will negotiate a debt reduction with your creditors on your behalf, to help you pay off debt in a more convenient way. 

Debt settlement companies typically achieve far better results than if you are negotiating a settlement with your creditors on your own.

What are the cons of debt settlement?

• Stopping payments may result in additional late fees, penalties, and pressure from your creditors.
• Debt settlement may negatively impact your credit score. 
• Debt settlement is not free of charge. Typically, debt settlement companies charge a fee for their debt relief services.
• You may also have to pay income taxes on your forgiven debt amount, as it may be considered taxable income. 

Debt Consolidation vs. Debt Settlement: Which One Is the Right Choice?

The choice between debt consolidation and debt settlement depends on an individual’s financial situation and goals.

Debt consolidation is best for those who have manageable debt and want to simplify their payments. They can achieve a lower interest rate to pay off their debt more efficiently over time.

Debt settlement is more suitable for individuals facing significant financial hardship who can’t realistically meet their debt obligations and need immediate relief by negotiating a reduction in the total debt owed.

While debt consolidation can protect your credit score and provide a structured repayment plan, debt settlement can negatively affect credit scores and may involve additional fees. The right choice depends on the severity of the debt, the individual's ability to repay, and their long-term financial objectives.

Debt Settlement Alternatives

Are there alternatives to debt settlement? Actually, yes. In fact, there are several effective strategies that can help manage and reduce debt.

One option is a balance transfer credit card. Balance transfer cards allow you to move high-interest debt to a card with a lower interest rate, often with an introductory 0% APR period. Remember that a 0% annual percentage rate is usually offered for the first few months. If you can manage to repay the credit card during this time frame, you will have benefited from interest-free debt repayment.

Another approach is a debt consolidation loan, which combines multiple debts into a single loan with a potentially lower interest rate. This simplifies repayment and can lower monthly payments.

The debt snowball method focuses on paying off the smallest debts first, providing quick wins to build momentum.

Conversely, the debt avalanche method targets debts with the highest interest rates first, which minimizes the overall interest paid over time.

Finally, a credit counseling agency offers professional guidance and personalized plans to manage debt and improve your financial habits and personal finances. It can teach you useful financial skills such as financial planning and the concept of income and expenses.

Each alternative has its advantages, and the best choice depends on individual financial circumstances and goals.

Next Steps for Debt Settlement

The debt settlement process is straightforward when handled by a professional. Here are the steps involved:

1. Assess Financial Situation: Review and evaluate your total debt, income, and expenses to determine if debt settlement is a viable option.
2. Research Debt Settlement Companies: Select a reputable debt settlement company like ClearOne to negotiate directly with creditors. You want a professional with experience in the debt settlement process to negotiate on your behalf.
3. Stop Payments: Temporarily stop making payments on your debts to build a lump sum for negotiation. This will impact your credit score but it will eventually get you out of debt once your debt is settled.
4. Negotiate with Creditors: Your debt settlement company will contact creditors to negotiate a reduced payoff amount and offer a settlement amount.
5. Reach Settlement Agreements: Obtain written agreements from creditors outlining the settlement amount and terms.
6. Make Settlement Payments: Pay the agreed-upon settlement amounts to creditors. You are then debt-free!
7. Monitor Credit Reports: Check your credit reports to confirm that settled debts are reported accurately and begin rebuilding your credit. With careful financial planning, you will be able to rebuild your credit score.

Contact ClearOne Advantage

If you are struggling financially, debt settlement can be the way out of the debt trap that you need. Contact a ClearOne Certified Debt Specialist today at 866-481-1597 and get a free savings estimate to see how much debt settlement can save you!

The information provided is for informational purposes only and is not intended to provide lending or financial advice. ClearOne Advantage is not a lender, credit repair or consumer credit counseling company. ClearOne Advantage doesn’t provide lending or financial advice. Please consult a certified financial advisor for individual credit and lending advice.