Debt consolidation and debt management are very different strategies for helping to address problem levels of debt. If repayments are simply becoming unaffordable on secured and unsecured debt, then it is essential to act as soon as possible. Determining which of these options is best for your situation ought to be an absolute priority.
In its most fundamental level, debt consolidation involves reducing the number of creditors you owe by consolidating all of the debt into one monthly repayment. This should – in theory – be easier to manage, although it will do little to actually reduce the amount owed. It is more likely that you will be repaying more than the amount actually owed – but can do so making considerably lower monthly repayments.
Debt settlement involves negotiating with creditors to reduce the actual overall amount owed. It can result in large amounts of debt simply being written off, although there are some considerable downsides that need to be considered first. It is not as ‘nuclear’ a decision as going for all-out bankruptcy but can have quite serious repercussions for credit scores further down the line
With debt consolidation, you are taking out another loan to repay the amount you owe across all of your existing debts. This is usually performed via a specialist company (there are many to choose between) who will arrange everything on your behalf. Be aware that some of your creditors will close lines of credit and others may choose to keep them open. One of the advantages of using a good debt consolidation company is that they will look to reduce the amount of interest you may otherwise be paying. If you have very high-interest loans (credit cards/payday loans etc) then restructuring can put an end to those expensive – and often unserviceable – debts.
For people absolutely drowning in debt consolidation loans can provide a sensible lifeline. Just be aware that in most cases you will end up paying back more than what you owed previously. How much depends on the amounts involved and the interest on each of the loans. It is worth remembering that consolidation loans tend to be secured upon an asset – most usually property, retirement/pension plans, and insurance schemes. Do not expect to be offered a debt consolidation loan without these assets at reasonable terms.
This debt reduction strategy involves proactively negotiating with your creditors to reduce the amount of debt you owe. While they are under absolutely no obligation to accept your offer, the fact is that debt recovery is an expensive and longwinded process that many companies would rather avoid. Even if they can only recoup a portion of the amount owed, it is often still better value than taking a debtor to court and instigating recovery proceedings. Effective debt settlement involves negotiation and the good news is that most companies are far more openminded to this process compared to just a few years ago. If they can recoup half of the amount owed in just one phone call, then it is easier and far cheaper than months of legal proceedings!
If you take this route, then it is recommended that you consider using a debt charity to negotiate as a third party on your behalf. It is important to be utterly transparent with the amounts you owe and to address priority debts first. Debt settlement will reflect on your credit record for several years and you can expect to struggle to find any good value loans after that period (you need to rebuild your credit score).
Both debt settlement and debt consolidation have their advantages and disadvantages. Deciding which approach best suits your requirements requires some serious consideration – and do not be tempted to just consolidate your debts right away. Doing so may not be the best option long term. To recap the key differences between debt consolidation and debt settlement:
1) Both can help reduce your debt load but use different strategies to do so.
2) Settlement reduces the debt while consolidation reduces the number of creditors.
3) Consolidation is basically a new loan with its own rate of interest and repayment schedule.
4) Consolidation is almost always more expensive in the long run – but your monthly outgoings can be much more manageable.
5) Debt settlement reduces the amount you owe your creditors for good. It will have consequences for your credit score.