Consumers struggling with paying their bills and out-of-control debt often hear about debt settlement or debt settlement companies. While debt settlement is sometimes a good option for consumers, there are significant potential downsides of renegotiating your debt that you need to be aware of before committing to a debt settlement program.
Settlement Rights
When you take out a loan, whether it is a personal loan, mortgage or credit card, you agree to pay back your lender the money you borrowed plus whatever fees the lender charges you in interest. Every time you agree to take a loan, you and the lender agree to specific terms about the money borrowed. You can negotiate the terms of the loan before you agree to taking the money, but you can also negotiate the terms after you've entered into the agreement.
Willing Borrowers and Willing Lenders
A debt settlement is simply a renegotiated loan. Your ability to settle your debts depends entirely on the willingness and ability of both you and your lender to enter into a new agreement. In the same way that no one forced you to take your loan, no one can force a lender to agree to a settlement. If a lender is unwilling to settle your debt, there is nothing you or anyone else can do about it. Be careful when you hear claims of "guaranteed" debt settlement.
Terms
Debt settlement comes in several types, all of which involve renegotiating the terms of the original debts with the lender. Often, borrowers negotiate a flat fee settlement. For example, if you owe your lender $10,000 but are unable to make monthly payments, you may be able to settle your debt by offering to pay a single payment of $7,000. In exchange for this large payment, the lender agrees to forgive the remaining $3,000. Other options include lowering interest rates or extending the length of the loan.
Cautions
When combined with debt problems, the allure of debt settlement is a strong enticement to borrowers who need help, and there are no shortfall of companies offering to help you settle your debts. Remember, the only way to negotiate a settlement is to get a lender to agree with the terms of your offer. There is no legal requirement that you use a settlement company. Be careful about choosing a company or service that offers debt settlement, as they can charge you a lot of money for something you can easily do yourself for free.
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