Debt Settlement vs. Debt Consolidation
On many late night infomercials it seems that the terms “debt settlement” and “debt consolidation” are interchangeable. The truth is, these words refer to two very different strategies when it comes to paying off debts. If you’re thinking about the best way to get out of debt, it’s a good idea to know the difference.
Debt consolidation is a method of paying off debt that allows a person to take all of their current outstanding debts and combine them into one loan. Typically, this loan has a lower interest rate than their old loans and better payment terms. In the best situations, this means that a person is able to pay less money every month towards their debts and still pay less in interest than they would have without consolidating.
Debt settlement is a process in which a person negotiates with his or her creditors to get better loan terms. In most cases, banks and lenders are willing to lower interest rates and minimum payment amounts in exchange for a greater liklihood that a person will pay off his or her loans instead of defaulting on them. In many cases, the creditor is even willing to reduce the overall balance of the loan.
In general, consumers choose to go through debt settlement when they have loans with balances that are too high for them to make any reasonable headway. The most common type of loan that goes though settlement is medical debt. Hospitals and their collection agencies typically have a lot of leeway with which to lower the overall balance of a person’s bill, making them ideal candidates for settlement. Credit card companies tend to be very willing to negotiate on interest rates, but getting them to lower an account balance can be very difficult for a person to do on his or her own.
In a lot of cases, a person can go through both of these processes in order to lower his or her debt. By going through debt settlement, he or she can lower the overall balances and some of the interest and fees. Once this is done, a person can use debt consolidation to pay off all of these loans, then pay back the new lower interest rate loan at a smaller rate every month.