The Difference Between Debt Settlement and Debt Consolidation

Debt settlement is the process of negotiating a one-time, lump sum payment to a lender for less than the remaining debt you owe. Many lenders are willing to enter debt settlement because it helps them recover at least a portion of the bad loan instead of losing the funds all together. Borrowers benefit because they avoid bankruptcy and default through the negotiations. If you are considering debt settlement for more than one loan, you may benefit from debt consolidation. 

The Difference between Consolidation and Settlement

You may pursue debt settlement alone or through a company. If you have the cash to make the one-time payment, pursuing settlement on your own will save you money over taking a loan from a credit consulting agency. Settlement usually occurs on just one loan, but it may occur on many. Consolidation is the process of settling many loans, typically pursued through a new lender. The new lender pays off your existing loans with a new loan, and then you pay the lender one time monthly at a given interest rate. The interest rate should be lower than the previous rates on your other loans for this option to save you money.  

When to Opt for Settlement

You should pursue debt settlement when you have the funds available to pay off one or a few different loans. As this is a form of loan modification, there will be some negative repercussions. You should only pursue this option if you cannot pay the loan off according to the original terms. You may face fees and penalties from the original lender when you seek to modify the loan.

When to Opt for Consolidation

You should pursue consolidation when you have multiple loans that you can no longer afford. This is also a form of loan modification, meaning you will face fees and penalties among other negative repercussions for the incident. However, loan consolidation can help you reduce the total number of monthly payments you are making to simplify your bills. It can also help you lower interest rates on existing loans. 

The Benefits of Loan Modification

The number one reason to enter loan modification is because you can no longer afford your loans at the original terms. If you can, you should consider paying off the loans on schedule. You may also enter loan modification if you can save money over time through the changes. For example, if the cost of settling your loan and paying the penalties is lower than the cost of paying off the loan on time, you should consider the option. Likewise, if the cost of consolidating your loans at a lower interest rate will allow you to save money, this may be a good option for you.

The Downside of Loan Modification

All loan modification comes with both financial penalties and credit penalties. The financial penalties are typically assessed by the lender as a result of you exiting your contract with them. Some lenders will not even allow you to break the contract, but many will do so if they stand to benefit in some way. The second large negative will appear on your credit report. Any time you modify a loan, it will hurt your credit score. Lenders do not generally benefit from loan modification, and they will alert other lenders you have taken this step.


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