Is There A Difference Between Debt Consolidation And Debt Settlement?

Nowadays, the globalization policies of manufacturing and service providing companies have provides customers with varied options. In order to fulfill personal demands, financial institutions have also joined the bandwagon of customer satisfaction by offering easy credits. What ever be the reason, you can seek any kind of loan based on your requirement. But, the situation goes to ruins, when you cannot repay the accumulated debt that has been caused due to your uncontrolled shopping habit. Then, you wonder, whether to go for debt settlement or debt consolidation program.

Is There Any Difference Between Debt Consolidation And Debt Settlement Options?
Debt settlement and debt consolidation are both financial strategies to improve personal debt load. But these options function in a different manner and they are used for resolving different issues. If you give a proximate look at basic level, debt consolidation is used to reduce total number of creditors to whom debts are owed. Debt settlement is helpful in reducing the total amount of debt owed. It is possible for receiving secondary benefits by implementing either strategy, but you can get more benefits by choosing debt consolidation program.

Debt Consolidation
In this case, you consolidate your previous debts by means of consolidation loan, which is a treated as single loan. This kind of loan combines and replaces all your previous debts into a single monthly payment with single interest rate.

Consolidation loans are provided through financial institutions, usually credit unions or banks and all of your debt payments are made to new lender. For some people, the psychological advantages of having a consistent, single monthly payment are sufficient for warranting a debt consolidation strategy.

In some situations, a debt consolidation loan may result in lower average interest rate or lower total monthly payment on your debt. This can be offset by extending repayment terms. So, you need to consider long term cost of debt consolidation loan. Many consolidation loans are secured by one your assets like your retirement account, car, insurance policy or home. If you are comfortable in putting up substantial collateral, then only accept the secured consolidation loan. You can learn by reading debt consolidation reviews.

Now, Look At Debt Settlement
A debt settlement is a financial strategy that does not aim to replace the existing debt by granting fresh loan, as it takes place in case of debt consolidation. Debt settlement involves number of negotiations between you and your creditors for making payments. Here, you have to pay a lump- sum amount the value of which is less than the debts that you owe.

In case of debt settlement, there is no compulsion on creditors that they will enter into negotiation by accepting your offer. However, it is possible for paying less than you owe currently, if creditors believe that your offer displays the creditors’ suitable chance for recouping the loan.

Accounts receivables and advanced debt collection techniques can be expensive. Fighting through bankruptcy proceedings is not appreciated by many loan lenders. After one round of communication, this process is not completed. For forcing a creditor’s hand, stretching out debt settlement process is a prevalent strategy.

Unfortunately, the ordinary and widespread usage of these terms has lead to belief that these kinds of concepts are synonyms and there is no difference between them. With modest clarification, you will be able to distinguish when they used for different notions and when they are used as synonyms.

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Author: Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com.