Just like everything has its pros and cons, debt consolidation is also not spared from the cons in spite of its multiple benefits. Consider what the experts have to say about the good, bad and ugly side of debt consolidation and then decide whether or not this is a good ideal for you.
When you have to deal with the monthly bills of different loans that you may have taken from a bunch of different creditors you may find it very stressful. You even find it unmanageable having to juggle multiple payments, keep track of each lender and worry constantly about your credit score. Further having a CIFAS marker in any case can only build more stress. Thus, clearing a bank marker can be of some help.
Fortunately, you have the option to pool all your debts into one which is the most popular and perhaps the most effective form of debt refinancing in the recent times. Moreover, given the fact that there are a multitude of sources from which you can avail such a loan to consolidate several different loans into one has made it a runaway success in the debt management segment.
However, if you want to know whether a debt consolidation loan is the right option for you, it is required to know about it right from the start.
Reasons for favor
The most significant reason that most debtors opt for a debt consolidation loan is the convenience in debt management. Now that you have only one single debt to repay, there will be no scope for missing out any payment. You will have enough money in hand to pay the single bill than having to allocate it to different bills.
- A debt consolidation loan will minimize the monthly payments and reduce the interest rates being a single loan. You will need to focus only on paying this loan off which will be much easier for you now.
- In most of the cases, a debt consolidation loan offers a much lower rate of interest. Well, it may seem high when you consider one of your existing loans but when you take into account and calculate the entire amount that you may as interest each month for all those debts you hold and compare it with the interest amount of the single consolidated loan you will see that it is much lower than it.
Therefore, even if you do not get a better payment terms or rate of interest than your existing loans, debt consolidation is the best form of debt refinancing.
Considering debt settlement
Struggling through your debt and looking for ways to repay it you may have visited several websites, read several debt consolidation reviews and done a lot of research. You may also have come across debt settlement option which is another alluring option to get rid of your debt. Now, in such a situation it is quite evident that you will want to know which the best way to repay your debts is. Well, a proper comparison will make things clear to you.
Feature of debt settlement includes:
- It is also debt arbitration or debt negotiation
- The negotiation is done by the debtors through a debt settlement company
- If the creditors agree you will pay reduced amount of your total outstanding debt.
It has a unique working process where you do not pay the creditor but to the debt settlement company. You may pay tem monthly or in lump sum amounts. The company does not pay this amount directly to the bank or the lender. They will keep the money in a savings account until a significant amount is amassed and paid off to the creditor.
- However, once you default, the debt settlement company will use your default as leverage and negotiate with the creditor for a reduced amount. The creditor when agrees to accept such a reduced amount the money is paid and your debt as full and final settlement.
- In return, you will need to pay a fee to the debt settlement company for their service which may be 15 to 30 percent of the total amount of money you save in the process or the total amount outstanding when the company took up your case. This can be a significant amo9unt and therefore should be taken in to consideration.
In most of the times it is seen that a debt settlement may be a bad idea even if it sounds to be a great option to pay less than what you actually owe to your creditors. However, there are a few serious consequences of this option:
- During the process of negotiation you actually stop paying to the creditor and therefore the creditor registers your non-payments as defaults. This is done so as to press the creditor to accept a reduced payment and without falling back a couple of payments in their records this is not possible.
- All these defaults and late payments are reported to credit bureaus by your creditor which will eventually reflect and affect your credit score. Even if you settle the debt, this history in your credit score is not erased for a minimum of seven years. You may improve your credit score in a short time but not your credit history.
That fact that your loans was paid-settled or charged-off settled and not paid-in-full, will be available to all future lenders for the next seven years. This will affect your eligibility for a loan in the future. Moreover, you will have to pay taxes for the amounts saved.
Considering debt consolidation
Therefore, taking everything from the bad credit history to the additional tax and service fee, debt consolidation seems to be better than debt settlement.
Signs that will make you a perfect fit for debt settlement include:
- When you are frustrated with your multiple loans and payments
- When you are slowed down in your debt repayments due to the multiple interest payments
- When you have the scope and discipline to stop using debt and will not be tempted to use your credit card again and
- When you do not know where to start.
This is where a debt consolidation can help you a lot wrapping it all into one package.