Debt settlement might be the better choice if you have a lower credit score and can’t afford your monthly payments. By working with your creditors to settle at least a portion of your debt, you might be able to avoid bankruptcy. You also might keep your accounts away from debt collection agencies. If you have a stronger credit score, applying for a debt consolidation loan might be the smarter choice. Most lenders that originate home equity or personal loans require that borrowers have a credit score of at least 640, though this does vary. Be sure that your budget can handle whatever new monthly payment you must make to repay your debt consolidation loan.
|
Debt Consolidation |
Debt Settlement |
|
|
Credit needed to qualify |
You’ll typically need a credit score in the mid-600s to quality for debt consolidation. |
This is usually reserved for consumers whose credit scores are too low to qualify for debt consolidation options such as personal loans or home equity loans. |
|
Reduction in the amount owed |
Debt consolidation doesn’t reduce what you owe. But you might qualify for a lower monthly payment or interest rate. |
Your creditors might forgive at least a portion of your debt, reducing the amount that you owe. |
|
Effect on credit score |
If you make the payments on your debt consolidation loan on time each month, you’ll steadily improve your credit score. |
Your credit score will take a dip if your lender closes your account after debt settlement. Your score will fall, too, if you deliberately miss payments before negotiating a debt settlement. |
|
Potential costs |
Lenders will often charge you closing fees when originating a loan. This varies, but when refinancing, closing costs can run from 2% to 6% of your total loan amount. |
Private debt settlement companies don’t work for free. You might have to pay a fee of up to 20% of your total debt. |
Debt Consolidation Vs. Debt Settlement: FAQs
Questions about debt consolidation and settlement are common. Here are answers to some of the most common ones.
Is debt consolidation the same as debt settlement?
Debt consolidation and debt settlement are not the same. With debt consolidation, you’ll take out a loan – it could be a personal loan, home equity loan, HELOC or cash-out refinance – and use the funds from this loan to pay off your other debts. This will leave you with one payment that hopefully comes with a lower interest rate. In debt settlement, you negotiate, either on your own or with a private company, a reduction in the amount you owe. Your goal is to convince your lenders or creditors to forgive at least some of your debt.
Can I consolidate debt with bad credit?
It is possible to qualify for debt consolidation with bad credit. But if your credit score is too low, you may not quality for an interest rate low enough on your new loan to make debt consolidation worthwhile.
How can I find reputable debt settlement companies?
Some companies that advertise debt settlement services will take your money and then do little or nothing to reduce your debt. To boost your odds of finding a reputable debt settlement company, look for firms approved by the AFCC or contact the office of your state’s attorney general for information about any debt settlement service you’re considering.
Is debt settlement better than bankruptcy?
Bankruptcy can seriously damage your credit score. Depending on the type, a bankruptcy filing will also remain on your credit reports for 7 to 10 years. That doesn’t mean, though, that debt settlement is always a better solution. Filing for bankruptcy might help you gain control over your finances. If you’re considering bankruptcy, speak with a credit counselor or bankruptcy attorney first. To read more click here.