Two methods of dealing with unmanageable levels of debt are debt consolidation and debt settlement. Although sometimes used interchangeably, these terms refer to two different processes. Debt consolidation refers to the purchase of a debtor's loans by a third party, who then issues the debtor a single, large loan. Debt settlement refers to a settlement reached between the debtor and his creditors, usually in which the creditors agree to different payment terms.
Advantages of Debt Settlement
The main advantage of debt settlement is that the debtor generally comes away owing less than he did before. Although the precise amount by which creditors will be willing to settle varies greatly, settlements generally include some reduction in payments and may include a change in when and how the debt is paid. For example, a settlement may allow the debtor to make smaller payments over a longer period of time.
Disadvantages of Debt Settlement
The chief disadvantage of debt settlement is possible harm to a debtor's credit score. If a creditor agrees to accept less money than the debtor originally owed, he may report the debt to a credit reporting agency as partially written off. This affects an individual's credit score similarly to a default. In addition, if a debtor pursues a settlement through a debt settlement company, he may be charged additional fees by the company negotiating the settlement.
Advantages of Debt Consolidation
Although a person who agrees to debt consolidation does not see any reduction in the amount he pays, payments become more manageable. Instead of struggling to pay a number of creditors, the debtor only pays a single one. In addition, the loan issued by this new creditor may carry a lower rate of interest than many of his other debts, and the total payment size may be smaller than the total amount owed on each of the original debts.
Disadvantages of Debt Consolidation
The main disadvantage to debt consolidation is that the debtor sees no reduction in the amount of principal she owes. In fact, she may end up owing more principal if she opts for a lower rate of interest stretched over a longer period of time. Also, according to the financial reference website Financial Web, in some cases, a debtor may end up owing more in interest than if she had not consolidated her loans.
0 comments:
Post a Comment