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What is the Difference Between Debt Consolidation and Debt Settlement?
Are you feeling overwhelmed by a mountain of debt? You are not alone! Millions of people face the burden of debt, and navigating through the available options of debt management can be confusing.
Consider the two most common debt management strategies - debt consolidation and debt settlement. Both aim to reduce debt, but in very different ways. Understanding their differences is crucial for choosing the right path towards financial freedom. Read on to learn about debt consolidation and debt settlement.
Debt consolidation involves obtaining a new loan to combine multiple existing debts. It simplifies repayments through a more manageable loan. The process entails securing a completely new loan at a better interest rate compared to existing debts. This allows you to pay off previous obligations and streamline your monthly instalments or EMI payments.
Debt consolidation not only simplifies budgeting but also has the potential to reduce the total interest costs, which provides relief from dealing with multiple creditors.
Following are the benefits of debt consolidation:
Also Read - What Is Debt Consolidation and How It Works?
Debt settlement involves negotiating with creditors to accept a lesser amount than what is owed. However, this typically requires a substantial upfront payment; although some debt settlement companies may allow for a structured payment plan.
While creditors are not obligated to accept settlement offers, they may consider it if it seems the best chance to recover at least a portion of the debt. Qualifying for debt settlement usually requires demonstrating genuine financial hardship, making regular payments challenging. It is possible to handle debt settlement independently, engaging directly with creditors or through a representative.
Here are two of the most prominent benefits of debt settlement:
Here is a comprehensive table discussing Debt Consolidation vs Debt Settlement:
|
Feature |
Debt Consolidation |
Debt Settlement |
|
How It Works |
You take out a new loan to combine and pay off all existing debts. |
You stop regular payments and negotiate with creditors for a lump sum settlement at a discount. |
|
Interest Rate |
You can secure a lower interest rate on a debt consolidation loan. |
You pay less than the original amount owed, but no ongoing interest. |
|
Fees |
An origination fee for consolidation loans may be applicable. |
Debt settlement companies charge fees depending on the settled amount. |
|
Credit Score Impact |
Consolidating debt may briefly affect your credit score but it's usually less severe and short-lived compared to debt settlement. Other than that, consistent on-time payments will improve your score. |
Missed payments and defaults during negotiation can damage your credit score. |
|
Tax Implications |
There are no tax implications with debt consolidation. |
The forgiven debt may be considered taxable income. |
There are several advantages you get to enjoy with a Personal Loan for Debt Consolidation, which include:
The choice between debt consolidation and debt settlement depends on your circumstances, creditworthiness, and financial goals. If you have manageable debt and good credit, consolidation can offer long-term savings. For those struggling with significant debt and facing financial hardship, loan settlement might be a more viable option. In both situations, it is important to ensure that you continue to make timely repayments and clear your debt obligations to avoid falling into a debt trap.
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When you get help from debt settlement companies, they usually charge a fee that ranges from 15% to 25% of the debt amount that they are working on settling. You can connect with your debt settlement company to negotiate better terms.
Loan applications from individuals with a strong financial background and a positive credit history are approved quickly. The disbursal of the loan amount can take place within a short time after loan approval.
Consolidation loans may include an origination fee, and settlement companies charge fees based on the amount of debt saved.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply
Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.
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