Is Debt Consolidation Right for You?

Debt consolidation involves taking out a new loan and using this loan to replace lots of debt. For example, if you owe $100 000 in personal loans, car loans, payday loans, credit cards, and other forms of debt, you can take out a consolidation loan for $100 000, pay off all your creditors, and start making payments on the one loan. Generally, you will pay less in interest on one large loan than on several smaller loans (some of which might have high interest rates), and this can allow you to pay off your total debt amount sooner. There are debt consolidation companies that offer these types of loans, and customers can also seek these loans out through banks.

Debt settlement offer a solution for large bills. A debt settlement company will negotiate with a debtor’s creditors to arrange settlements and will have a debtor stop paying bills until this settlement is reached and until the debtor saves up enough to pay the settlement amount. The advantage of debt settlement is that the company will negotiate with creditors and will sometimes arrange to have companies drop penalty fees and other extra fees. As well, debtors no longer have to pay lots of monthly bills which they can no longer afford. Instead, they pay one monthly sum, which goes towards the settlement amounts. Keep in mind that debt settlement and debt consolidation companies are very different — if you decide to work with a debt settlement firm, make sure they are a debt settlement company.

Debt consolidation makes the most sense for borrowers who still have good credit ratings, the discipline to pay off an existing loan before taking on new debt, and property. If you have a home with equity as well as good credit, you can often take out a consolidation loan from your bank at a very favorable interest rate. If you have poor credit and no assets, you may only qualify for a bad credit consolidation loan, which might not make repayment of your debts much easier. Whichever loan you do decide on, it is important to keep in mind that consolidation is not an instant solution. You will still need to budget to repay your loan quickly and you will need to resist taking on new debt at all costs, since new debt will only add to your total debts until you are in over your head again.

However, debt settlement companies also have their risks. Some such companies are fraudsters. They charge large sums of money but disappear or do not deliver on their promises. Also, even when working with a legitimate debt settlement company, debtors can expect to see a big drop in their credit score. Even legitimate companies charge substantial fees – often %14 or even %18 of your total debt amount. In some cases, creditors will start legal action when a debtor stops making payments and starts working with a debt settlement company. This can lead to liens against your home and wage garnishments. If your debt settlement company successfully negotiates to have some of your debts forgiven, this amount will be counted as taxable income on your income taxes. As well, debtors need to keep in mind that debt settlement can take some time. Most debtors spend about two years working with a debt settlement company to resolve their debts.

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