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Settlement | Consolidation | Personal Loans

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Debt Settlement

Debt settlement is one method to alleviate yourself of debt. In a debt settlement, a debt relief agency contacts your creditors and offers them a reduced amount to resolve the entire debt. Agencies often tell creditors that their clients might just file for bankruptcy if they do not accept the settlement offer, so they take the bait and you are off the hook with at least $10,000 less than what you originally owed.

Debt settlement companies will ask you to cease payments on your bills and to make single monthly payments to them, instead. In turn, your accounts become delinquent, and the debt settlement agency negotiates with a settlement offer on your behalf.

The debt settlement company collects your payments for the meantime and stockpiles them along with a fee so it can use your payments as a bargaining chip in due time.

 

Because credit card companies collect overdue bills aggressively, you can expect to get a lot of badgering calls from debt collectors within the period where your debt settlement company is still collecting the fees. The credit card company will then write off the debt and sell it to a collection agency for lesser than what it is after 180 days. Your debt settlement company will then negotiate with the collection agency to settle the bill entirely.

The downside to this is that there is no guarantee that the creditor will agree to settle while your late fees, penalties, and dented credit score continue to pile up until a settlement is agreed upon.

  • Pros

  • Quick debt relief solution

  • Your selected debt settlement agency deals with creditors/collectors on your behalf

  • Cons

  • Your creditors/collectors might be opposed to settling

  • Late fees and penalties accumulate

  • The 180-payment default will harm your credit score

Consolidation

Debt consolidation is the method of unifying several debts into a single monthly payment. There are many different ways of consolidating debts, but each one of them leads to the ultimate goal of decreasing your monthly payments through reduced interest rates. Most debt consolidation programs have a term of 3 to 5 years and help you streamline your finances so you can keep up with several debts that have varying due dates.

The debt consolidation program was designed to promote a more abridged payment option through single monthly payments, faster debt repayment, and reduced interest rates. Conventionally, the debt consolidation program meant taking out one huge loan and using that loan to pay off several of your smaller debts, an effective approach if you have a spotless payment history and a high credit ranking. Otherwise, you might only get approved for a loan with a high-interest rate.

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In any case, you still have the option to consolidate your debts through a debt management plan sans a loan. Debt management plans are offered by nonprofit credit counseling agencies without using credit scores as a basis for approvals. Your debts will still be merged into a single monthly payment, however, your credit counseling agency will work with your creditors to lower your interest rates so you can minimize your monthly payments.

Debt consolidation programs are essentially used to settle unsecured debts such as credit card debts, unsecured loans, medical debt, payday loans, collection accounts, and past-due utility bills. Secured debts such as automobiles, homes, and properties are not eligible for debt consolidation programs but may be refinanced.

  • Pros

  • Enrolling in a debt consolidation plan will stop calls from collection agencies.

  • Lower interest rates, reduced monthly premiums, and simplified payments.

  • Cons

  • Credit cards are not allowed, however, some agencies are flexible on keeping an “emergency” credit card.

  • The interest rate is dependent on your credit score, which could be substantially low due to credit card debt.

Personal Loans (4)

Personal Loans

A personal loan is borrowing money from funding agencies such as banks, online lenders, or credit unions. Unlike other types of loans that have specific purposes or labels attached to it (such as a housing loan or an auto loan), a personal loan can be used by just about anything. You can apply for a personal loan to purchase a new house, renovate your home, buy a new car, pay for your wedding, or to consolidate your debts –take your pick.

Personal loans are typically paid back in fixed monthly installments over 2-7 years with APRs ranging from 6% to 35%. However, rates on personal loans are relatively cheaper and come with higher borrowing limits compared to those of credit cards.

As with all other loans, personal loans are usually approved based on credit score, debt-income ratio, and credit reports. Consumers who maintain an outstanding credit typically get the lowest APR while those with scores 600 below get a higher rate.

  • Pros

  • It has a more favorable interest rate.

  • May be used to consolidate debt.

  • It can be used according to what you need your funds for.

  • Cons

  • Has fixed payments that are required to be paid back on time.

  • It usually involves an origination fee.

Bankruptcy

Bankruptcy is a legal proceeding where a judge and a court trustee evaluate the assets and liabilities of a person or a business that is unable to repay outstanding debts and a decision is made on whether the debts are to be discharged and that the debtor is no longer legally bound to pay them.

The bankruptcy process starts with a petition filed by the debtor or on behalf of a creditor. Bankruptcy laws were made to give individuals a chance to start a clean slate in the event of a financial flop. People or businesses who file for bankruptcy usually perceive their debts to be higher than the actual on-hand funds that they have and do not see the situation changing anytime soon.

While bankruptcy can be a chance to start over and is a plausible solution to preventing foreclosures, repossessions, or debt collection, it can also cause a huge dent to your credit and future economic opportunities and carries some significant long-term fines that will stay on your credit report for at least 7-10 years.  

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The general rule of thumb is that, if you think that you won’t be able to settle all of your debts in the next five years, bankruptcy might be the best route for you. However, if you feel that you’re financial slump can still be salvaged with a little help, you might want to consider other debt-relief options such as debt consolidation programs.

  • Pros

  • You can start with a clean slate.

  • Eases the tensions of your debt problems and will stop collectors from badgering you.

  • Cons

  • It can cause a major dent on your credit score

  • It can completely block you off from future loans and investments.