Being in debt can be scary and deciding on what your best debt relief option is can seem confusing. Debt consolidation loans and debt settlement are two common debt relief options but how do you decide which one is best for your situation?
While a debt consolidation loan focuses on reducing the number of payments and the amount of interest you will pay, debt settlement aims to reduce the total amount of debt.
Debt Consolidation Loans
This method of debt relief benefits those who are in debt but still have a good credit score. If you don’t have a good credit score, this is typically not a good option for you. A debt consolidation loan works by applying for a single loan to cover your debt at a lower interest rate than you are currently paying.
Debt consolidation loans work by streamlining your debt rather than getting rid of it. With just one payment, it is easier to keep track of your debt. You also should have a lower interest rate on this debt, costing you less in the long run.
Keep in mind that transferring your debt can be dangerous, especially if you use your house or car to secure the loan. If you are unable to keep up with payments, you may lose your house or car. However, debt consolidation loans have a minimum impact on your credit score, unlike other debt relief options. The credit inquiry will have a slight negative impact initially but in the long-term, this option may increase your credit score if you pay on the loan consistently.
How do you know if a debt consolidation loan is right for you?
Debt consolidation loans are best for you if:
- Your credit score is still good, because you need a high credit score to get the lower interest rate, or this option will not benefit you.
- You have a healthy debt-to-income ratio. Your debt should not be above 40% of your income to benefit from this option.
- You have the willpower to change your ways. Once your credit card balances are back to zero, you have to keep them manageable to prevent your debt from growing out of control again. If you think you will go back to your old habits, this may not be the best option for you.
A more aggressive approach, debt settlement is for those who are in deeper debt, beyond the help of debt consolidation loans and without a good credit score. Generally, you need at least $10,000 in unsecured debt to qualify for this debt relief option.
This debt relief option is usually best for those who are already struggling to make ends meet. For example, if you are falling behind on your credit card payments, or are only able to make the minimum payments, and making no progress toward paying down the principal, this option may be good for you.
Debt settlement will impact your credit score, though typically not as much as bankruptcy would.
How do you know if debt settlement may be right for you?
Debt settlement may be the right solution for you if:
- You have a low credit score preventing you from getting low interest rates on loans.
- You have unsecured debt in excess of $10,000
- You have a regular income
A debt settlement company, such as ClearOne Advantage, negotiates with creditors to create a debt reduction plan and actually lessens your debt. You can usually expect to pay only about 75% of the total debt you owe, after fees are included.
Your program can last for as little as 24 to 60 months and the monthly payment is often lower than your current combined credit card payments. If you continue to make the minimum payment on your credit cards without debt settlement, it could take more than 15 years to pay off your debt and you could pay almost twice the total amount of money.
If you think debt settlement may be the right credit card relief solution for you, or would like to discuss your best debt relief options, contact a ClearOne Advantage Certified Debt Specialist at 866-481-1597 to get a free savings estimate today.