Debt creates a lot of stress and financial trouble in one’s life. While finding the solution, we come across several debt-related solutions. Debt consolidation, debt settlement, and debt management are some of the most popular solutions. Every option has its advantages and disadvantages. Before making any decision, it is essential to know about every solution in detail. If the borrower lacks the financial background, then understanding all the options by himself, in that case, taking guidance from a professional, is a much better option. If you want to look for an online financial company, then “snap finance” is worth consideration.
1. What is Debt Consolidation?
Debt consolidation is generally used when a borrower is under multiple debts. In this, the borrower consolidates all debts and take a fresh loan to pay off the consolidated debts. The borrower can take the loan either through a financial institution or can even transfer the consolidated payments to another credit card. The borrower can even use home equity to pay the consolidated debts.
The borrower can use debt consolidation to pay off medical bills, multiple credit card bills, personal loans, etc. With debt consolidation, the borrower ends up paying a single payment instead of multiple payments. Another advantage of debt consolidation is that the fresh loan taken generally has a lower rate of interest as compared to the consolidated loan.
This seems to be quite attractive; however, it has its own limitations and disadvantages.
Most credit card companies charge a fee (around3% of the total amount transferred) for a credit balance transfer.
In the case of retirement funds, any early withdrawal might not only have a penalty fee (10 percent), but also the borrower had to pay taxes.
Taking more loans against the house might make the selling of the house more difficult, especially if the home loan amount plus the lines of credit come close to the value of the house.
If you have a good credit history, you could be eligible for getting a consolidated loan at a lower rate of interest, which further reduces the monthly repayment amount.
2. What is Debt Settlement?
Under Debt settlement, the borrower tends to settle his/her debts by making payment lower as compared to the original amount. The borrower can either go for debt settlement himself/herself or can hire a debt settlement company. It is generally used to settle unsecured debts like medical and credit card bills.
Many Debt settlement companies charge a fee for the services provided by them. Some of the debt settlement companies might be successful in lowering the debt amount. However, not every debt settlement company fulfills its promises. This involves more risk as compared to debt consolidation.
Until the time the debt settlement company reached the desirable negotiation with the creditors, the interest rate, late payment charges, etc. continue to keep on adding to the borrower’s account. Furthermore, most of the debt settlement companies ask the borrower to keep submitting money in their account until the amount is enough to settle a deal with the creditors. In such a case, the failure on the borrower’s part to make the payment to the creditors can push creditors to file a complaint in the credit bureau. This would harm your credit report.
3. What is Debt Management?
Debt management is one of the safest ways to repay debt. Numerous non-profit credit counseling organizations provide Debt management services to borrowers facing financial crises in their life. They help the borrower in structuring a payment plan so that the borrower can clear the debts.
Under the Debt Management Plan, instead of making multiple payments, the borrower makes a single payment into the credit counseling company’s account. The credit counseling company then uses that amount to make payment to all the creditors. In most cases, the debt management plan lasts from 3-5 years.
- The debtor can clear unsecured debts within 3-5 years.
- The borrower has to pay just 1 monthly payment.
- Personalized support
- The debtor can rebuild the credit score by making timely payments
- The borrower gets benefits like reduced or no fees and interest.
While you are under a debt management plan, you are not allowed to apply for a new loan. Also, the debtor is refrained from using credit. If you are planning to go for a debt management plan, it’s advisable to select a reputable credit counseling agency as some non-profit credit counseling organizations charge a very high fee from their clients.
1. Repayment Amount
In the case of a fresh loan, the debtor needs to repay the loan taken to clear the consolidated debt. Hence the borrower has to pay the loan amount + the interest.
In the case of credit transfer, The borrower needs to pay the total transferred amount plus the interest. Also, many credit card companies charge a fee for the balance transfer.
At the time negotiation starts, the borrower might have to pay half to the total debt. In addition to this, the borrower needs to pay the fees and interest that keeps on getting added to the borrower’s account till the time the debt settlement company and the creditor company reach an agreement.
Debt Management Plan:
In most cases, the creditors reduce the interest rate. The borrower has to pay the debt amount and the interest that gets accumulated during the DMP duration.
In case of a loan, the cost depends on the type of loan taken, e.g., personal loan, etc.
In the case of a credit balance transfer, many companies charge a fee for a balance transfer. This fee is generally around 3 percent of the credit amount transferred.
It might cost the borrower monthly or upfront fees. It might cost around $1500-$2500.
Debt Management Plan:
In case the borrower has selected a non-profit credit counseling company, than the cost can be merely around $50 per month. However, this fee may differ from state to state.
3. Time to Repay
In case of a loan, the time depends on the loan repayment terms.
For balance transfer, repayment time depends on the payments made on the credit card.
It might take 2 or more years to settle the debt.
Debt Management Plan:
4. Impact on Credit
It depends on the type of consolidation, consistency of the payment, and if the borrower has reused the credit card or not.
It harms credit. The effect stays up to seven years.
Debt Management Plan:
The effect depends on the payment consistency and also on the determination of the creditor.
In case you have unsecured debt, and you are undergoing a financial crisis, the best-suited debt repayment option for you will be a Debt Management Plan. Just check the reputation of the credit counseling company before agreeing for a DMP.
Focused on providing information for anyone in need of debt relief, Jackson writes a blog on debt settlement, debt consolidation, tax debt relief and student loan debt which helps to find the debt solution that fits their unique needs no matter the amount of debt they are in.