Blog Finance Credit-Score-Drop-When-I-Apply-For-Loan Evaluating Debt Settlement And Debt Consolidation

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Evaluating Debt Settlement And Debt Consolidation

Two well-advertised solutions to debt are debt settlement and debt consolidation. While they share a common goal – helping you get out of debt – these two take a very different approach to getting you out of debt.

What Is Debt Consolidation?

Through debt consolidation, you combine all your debts by paying them off with a loan. Your total debt amount hasn’t decreased; instead, you’ve shifted your debt so that it may be easier to pay off.

Some companies inaccurately advertise debt settlement and credit counseling as consolidation because there’s a single monthly payment. However, if you’re combining your actual debts, then you’re consolidating your debts.

Debt consolidation involves you qualifying and getting a loan to pay off your debts. That may be hard if you have bad credit or if you lack enough home equity to obtain a loan.

What is Debt Settlement?

Debt settlement is very different from consolidation. To make a settlement, you typically negotiate with your creditors to get them to accept a lower, lump-sum payment and cancel the rest of the debt. If the creditor agrees, you make the payment and that debt is satisfied.

Some settlement companies may advertise this solution as debt consolidation because, once you hire the company, you may stop making multiple payments to all your creditors and instead send one lump-sum payment to the debt settlement company. The settlement company may save up all your payments and then make a settlement offer to your creditors once you’ve accumulated enough money.

Impact on Your Credit Score

Assuming you’re current on all your accounts right now, debt consolidation may not have any impact on your credit score. You could experience a decrease in your credit score when you apply for a debt consolidation loan or if you close your credit cards once they’re consolidated.

Debt settlement, on the other hand, will likely cause a drop in your credit score because you’ll have to stop paying on your accounts to settle them. Not only that, your account status will probably be listed as “Settled” once the settlement has been completed. This status will also likely impact your credit score and ability to get new credit for several months or years.

Additional Cost

You’ll have to pay interest on the debt consolidation loan. The total amount of interest may be higher or lower than what you’re currently paying depending on the interest rate and length of the loan. Ideally, you’ll pay less interest, but that’s not always the case.

There’s usually little cost associated with debt settlement if you do it yourself. If you hire a settlement company, you’ll pay a fee to the settlement firm for its services. Fees vary by settlement firm, but you might pay about 15% of the debt you get cancelled.

Which is the Best One

For some, debt settlement is a better option because they ultimately pay just a fraction of the total debt. However, if you don’t want your credit score to drop, consolidation could be a better choice assuming you can qualify for a loan large enough to pay off all your debts.

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