Debt Relief: Facts About Debt Consolidation & Debt Settlement

In short, debt consolidation entails getting one, lower-interest loan to pay off your other, higher-interest loans. You usually work with an accredited, non-profit company to do this. This option is best for consumers with high interest rates and/or many creditors. Your monthly payments will become lower, you can begin making a dent in your debt, and you can even improve your credit score. Another appealing feature of debt consolidation is that you get to pick when your bill is due each month. No more writing dozens of checks on different days of the month-you pay one bill, once a month. That's it.

How Debt Consolidation Provides Debt Relief

Aside from saving you the hassle of paying multiple creditors, debt consolidation can also provide debt relief in other ways. Debt consolidation will save you money on interest rates and late fees. Right now, you are probably paying sky-high interest rates because your debt has spun out of control. When paying such unreasonable interest rates, most of your money is going toward interest rather than your actual balance, or principal. This can make it next to impossible to pay off high-interest debt. When you consolidate, though, the non-profit company you work with will have established professional relationships with most of the creditors in the U.S. They can get you a lower rate, and these savings get passed on to you. In fact, most debt consolidation customers pay interest rates between zero and eight percent!

Debt Settlement: An Alternative Form of Debt Relief

If you have very high levels of debt, debt settlement might be a more suitable form of debt relief for your situation. The benchmark for "high debt" is usually about $10,000 for credit card debt. So, if you have over this amount, debt settlement would probably be the best option for you. With debt settlement, you hire a company to handle negotiations with your creditors. This means you have professionals working with your creditors to get your debts reduced. Typically, debt settlement can reduce your payment to about 40-60% of what you actually owed.

How Debt Settlement Works

Debt settlement provides debt relief because, basically, you stop paying your creditors. Rather than submitting monthly payments to them, you put the money in a savings or other type of account to earn money while the company negotiates with your creditors. Once the negotiations are over, the money you have accumulated in the account will be used to pay off your creditors for considerably less than the original amount you owed. Some debts are settled for as low as ten to twenty cents for every dollar. Though debt settlement will provide significant debt relief, it does have a negative effect on your credit. Until you completed the debt settlement process, your credit would suffer. The good news is that once you complete the program, it is not difficult to reestablish your credit, especially since you will be debt-free.

Making Debt Relief Permanent

Debt consolidation and debt settlement are both excellent options to get you back on the path to financial freedom. But they are just the first step. The rest is up to you. Once you consolidate or settle your debts, you'll have to be disciplined in paying off your loan or filling your settlement savings account, as the case may be. For some, having the end of debt in sight and attainable is enough motivation to diligently pay off remaining debts. However, if you feel like you might need extra help to do that, credit counseling is something you might pursue. Credit counseling will help you manage your spending and pay down your debts responsibly and quickly. Credit counseling can also make your debt relief permanent by helping you make life changes to avoid getting back into financial trouble again.

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