One of the biggest challenges debtors face in their life is when creditors are knocking from everywhere, over the phone, on your door, and you really don’t have a penny to pay. Life can be really harsh at times, and the importance of money and reputation did get so very prominent and pronounced when you see such situations. Not all times are the same in life, and when you took the loan, you possibly knew you would be able to pay, and later you discovered you are in a deep puddle of multiple unmanageable debts. After this realization come the next steps. You start thinking about how to get out of the problem and among the many the two suitable options you come across through advice from friends, consultants, family, etc. are debt consolidation and debt settlement.
Now, before you take any decision about either, you must know in detail what to expect from them. Both have a different approach and come in a different way to handle the debts. But both ways you get out if your current situation in time.
What is debt settlement and what to expect from it
Debt settlement is the process of settling the debt such that you pay a lower amount than the original amount you owe to the creditor. In this process, a middleman who is the debt settlement agent or advisor is hired from a debt settlement service. You can find one such service near you by reading the reviews. The settlement agent would talk on behalf of you with all the reasons from your end to not pay the debt, and give your offer to the creditor about the lower amount.
The settlement agent would attempt to persuade the creditor to accept the offer and allow you to pay a lower amount, and waive off the rest of the charges against you. Normally this takes time, and sometimes the negotiations work and sometimes does not. It’s a chance factor, which again can be made to work the best when you choose a debt settlement service by studying their debt settlement ratings.
During the process, you are said not to make any more payments towards that debt, and not even any old penalties till the negotiations are over. This is done to build the pressure on the creditor to accept the offer from your end.
Some important expectations you must set from your debt settlement attempts are as follows:
- It takes time to convince a creditor for the settlement and negotiate with the final payment amount. You may have to wait for a few months to three years for things to work out.
- Since it takes time for negotiations and you are not allowed by the settlement services to pay any money to the creditor during this period, hence your credit rating gets affected and lowered due to constant non-payment of installments and late penalties.
- When things are finally settled, and you are said to pay the settlement amount to the creditor, then you must have that money to pay to the lender, and the service charges to pay to the debt settlement services.
What is debt consolidation and what to expect from it?
Debt consolidation works best for debtors who are stuck in between multiple debts. If it’s just one big debt, then this option is not for you, and you may go for a settlement instead. But if you have multiple loans, and you are struggling to pay their EMIs which have to be paid at different dates of the month with different amounts, then it can be really tough to track and maintain. You may not have funds arranged for the payment at the time, or you may miss the payment date, and in this way, it creates pandemonium in many cases. When it’s such a situation, then you may go for debt consolidation.
In debt consolidation, a larger loan amount, which is called the consolidated loan, supplied by you. And you do this to pay off all the dues you have at present to various creditors. That’s why the consolidation loan amount must suffice all the payments and penalties that you owe.
This does not take much time. The time is taken to get the sum of all the dues, apply to the debt consolidation loan offering finance companies, and finally getting it approved, takes a few days to a month or so. And then you are sorted. The only thing you must be ready for after this is that you will have to pay the consolidated new loan EMI that you are taking to pay old dues. And you will have to pay this on time. But then again, paying this gets much simpler, and easy to manage because:
- It’s only one EMI in the month
- The amount you will pay will be lower than the cumulative amount you paid now for the multiple loans because the average rate of interest will get lowered with the debt consolidation loan.
- Finally, the tenure you get to pay back is longer thereby making the EMI smaller and easier for you to manage out of your monthly expenses.
But you will have to be sure that you have the following for getting a consolidated loan:
- A satisfactory credit score
- Proof of residence showing the same address for at least 6 months
- Proof of stable or satisfactory earnings for at least six months
Whether you go for debt consolidation or settlement, you must check your options and profile well, so that you do not face any hitch in the process, which again slows down the debt management process.
It’s important that you collect enough feedback about the company you are contacting for your settlement. And you should also research well about the finance company to which you may apply for the debt consolidation loan.
If you have the chances of squeezing out any amount from your monthly expenses, then before going for debt settlement you can always try your luck with debt consolidation options.