What Are Debt Consolidation And Debt Settlement – A Complete Guide In 2021

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Debt consolidation

In this modern-day and age, managing Debt is part and parcel of our lives. So the faster we learn it, the better it is for all of us. As you are reading this article, I presume you want to know about debt consolidation and how different it is from debt settlement. 

I am a financial advisor myself, and I have been enjoying my job for the last ten years. In the US, the Federal Debt is at a whopping 27 trillion USD. So it won’t be wrong if I say ours revolves around all sorts of Debt.

When it comes to debt consolidation and debt settlements, both of these terms are actually monetary strategies used to improve personal debt load. Even if these two terms are seldom used synonymously, in reality, they are completely different from each other. 

They function very differently and resolve different problems. In simple words, debt settlement is used to reduce the owed amount, whereas debt consolidation is the reduction of the number of creditors one owes. These two strategies provide a ton of secondary benefits, especially debt consolidation

Debt Consolidation Explained

Debt Consolidation Explained

Debt consolidation is replacing all your loans with a single loan. As the name suggests, it consolidates all your loans into one single loan. It ensures that all our debts are combined into one single monthly payment. 

Consolidation loans are mainly processed by banks and financial institutions. It lets borrowers make debt payments to a new lender. 

People usually love this kind of Debt psychologically; it is quite soothing. You are obliged to pay only to a single lender. Consolidation loans also have lower monthly payments and lower interest rates. However, consolidation debts are good for the short term and not good for extended payment terms. 

Consolidation debts are usually secured loans and are most certainly backed by some of your assets. These assets may include your home, your car, retirement fund, and insurance policy. So you must note that these assets are put in jeopardy. 

Only take consolidation loans when you feel that you do not mind putting up these assets as collateral. This is a very important thing to learn about debt consolidation. 

How Can You Avail Yourself Of The Best Debt Consolidation Loans?

There are many lenders in the US that provide consolidation loans. Choosing the right consolidation plan is the first step for selecting the best Debt Consolidation loans. There are many institutions that provide some of the best debt consolidation loans, these include:-

Lending Institutions Annual Percentage Rate

  1. Payoff 5.99%–24.99%

  2. Avant 9.95%–35.99%

  3. Rocket Loans 7.161%–29.99%

  4. Wells Fargo 5.74%–24.49%

  5. Best Egg 5.99%–29.99%

Debt Settlement Explained

Debt Settlement

If you are a working individual who has been into Debt, then you probably know what a debt settlement is. In simple words, debt settlement is the strategy used to reduce the amount of money you owe to the lender. It does not replace the existing Debt, but it is a process of negotiating with the lender to conclude how you are going to pay the remaining amount of money owed. In most cases, the amount decided is less than the money you owe.  

However, do keep in mind that the lenders are not obliged to enter into a settlement. If they want, they can sue you for not paying the remaining amount of Debt. But in today’s time, most creditors enter into debt settlement options, given that your offer is the last and best chance for them to get at least some portion of the loan. 

Since most creditors do not like to endure the hustle and bustle needed to hire a lawyer and go to courts, they enter into debt settlement options. Fighting cases in the court of law is expensive, and most lenders try to avoid it as much as possible. So as you can see, it is quite different from debt consolidation. 

Negotiations In Debt Settlement

Like I already mentioned before, lenders are under no obligation to enter into a debt settlement negotiation. Negotiating a debt settlement can often feel like a daunting task and, at times, a little overwhelming. For instance, you owe a lender a total sum of $20,000. 

You have paid 15,000 and are unable to pay the remaining of the $5000. You may enter into a negotiation, and the lender may agree only for that one time, and he may also erase the $5000 you still owe. In another scenario, the remaining $5000 can be divided into smaller EMIs by the lender, and then you are given a choice to pay $500 dollars every month for ten months. 

You just need to know who to talk to and how to enter into a debt settlement negotiation. It is important to keep in mind, though, a debt settlement negotiation severely affects your credit score and might make it very difficult for you to borrow money in the future.   

Should I Opt For Debt Settlement Negotiation?

It totally depends on your financial position; as a financial advisor, I would suggest you keep debt settlement negotiation as a measure of last resort. It is because when you opt for debt settlement negotiation, you are basically jeopardizing your creditworthiness. If you have the money, pay your Debt in full. 

As you can see, debt consolidation and debt settlement are very different from each other. 

Final Thoughts On Debt Consolidation And Debt Settlement 

There you have it; now I believe you know pretty much everything you are required to know about Debt Consolidation and Debt Settlement. As a financial advisor, I hope you have learned something new about Debt today. 

Both these strategies of debt consolidation and debt settlement have their fair share of cons, but they come in very handy when you are pushed to the edge. Managing Debt is undoubtedly one of the major challenges that youngsters are facing, so it is important to have a firm knowledge of all the financial terms.

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