Debt consolidation
Debt consolidation involves the consolidation of all kinds of debts. These include credit card debts, pending bills and dues, mortgages, unpaid loans and various other kinds of debts. Usually a new loan is provided in debt consolidation loans. This loan has lower rates of interest compared to the previous high interest debts. A monthly repayment has to be made to the new lender or the debt consolidator. This repayment includes all kinds of charges like late penalties and fines, interest rates, fees of the debt consolidator and various other charges also. Hence the debtor does not have to worry about any other payments or pending dues.
Debt settlement
The process of debt settlement is also known as debt negotiations. In this process the debtors negotiate with creditors or hire professional debt negotiators to do the same. Here an attempt is made to make the creditors agree upon reduction of debts. Usually the creditors are requested to reduce the principal amount of the debt owed or reduce the interest rates along with easy repayment options. This procedure is applied to unsecured debts. The process usually takes a few months to be completed.
Debt consolidation and debt settlement differences
In debt settlement the tax liabilities of debtors are increased. Also debt settlement results in rapid decrease of credit scores. But in debt consolidation there are no changes in the tax liability options and credit cards improve drastically due to the clearance of multiple debts. Debt consolidation can be done for both secured and unsecured loans. But debt settlement is usually restricted to unsecured loans. Debt settlement is accepted by creditors only if the accounts of the debtors are in delinquency status but debt consolidation is easily accepted by all lenders. Those who are applying for bankruptcy usually resort to debt settlement. But those who want to assure a secure and profitable financial future opt for debt consolidation loans.
Selection between debt consolidation and debt settlement
There are certain factors which predetermine the selection of debt consolidation or debt settlement. The first is credit scores. Those with poor credit rating end up with bad credit debt consolidation. Since the interest rates for previous debts and the new loans are mostly same it is better to go for debt settlement. Also without collateral lower interest debt consolidation loans cannot be availed. But if you have collateral or good credit scores then it is always recommended to go for debt consolidation rather than debt settlement.