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Debt Debacles: Should You Settle or Consolidate?

Debt Debacles: Should You Settle or Consolidate?

Man at computer debating settling or consolidating debt

When it comes to debt, it’s much like the common cold; everyone experiences it at some point. The trick is to monitor your debt and weigh all your options for repayment before you slip into a financial mess. While many financial institutions offer debt settlement and consolidation, it’s important to know and understand exactly what those terms mean and what effect they will have on your financial future.

“What Is Debt Consolidation?”

Basically, the idea of debt consolidation is when you take out a loan and use it towards paying off your other loans, essentially consolidating all your debt into one big lump sum payment. These combined debts make one larger piece of debt, but usually with more feasible payoff terms such as a lower interest rate or lower monthly payments. Generally, this plan of action is desirable for people who have high consumer debt.

However, a common misconception is that once you’ve consolidated your debt into one payment, that’s the end of it. On the contrary! In fact, when consolidating your debt, it’s likely to come back as more. This is mainly due to large to the fact that consolidating debt isn’t really a solution, it’s more of a Band-Aid. Basically, while consolidating debt can buy you some time, it’s not going to help with poor financial habits or help you in a wealth building game-plan.

“How Does Debt Consolidation Work?”

Let’s pretend you have $50,000 in debt, including a $20,000 2-year loan with a 12% interest rate and a 4-year loan of $30,000 with a 10% interest rate. A debt consolidation company will tell you they can lower your monthly payments and interest rates to say 9%, with the help of negotiating with creditors and piling the loans together. However, there’s a catch. What you might not see is that your once two-year and four-year loan have now added up to a six-year loan. While that may seem like small potatoes and you may believe you’re buying yourself more time, in fact you’re paying additional costs and interest during those extra years, making the money owed more and more.

“What Are My Other Options?”

While ideally, paying off debt with timely payments is the best choice, there are other avenues you can take when faced with an overwhelming amount of debt. While many lenders offer the help of consolidation, there is also debt settlement, loan repayment plans and even repayment assistance, which can help you make a better plan of action for your payments and their schedule.

One thing to remember is that taking out a loan or line of credit to pay off another owed amount can seem like a quick fix to missing payments, but can hurt your financial record down the line. Whether it lead to more debt or a poor credit score, it’s best to avoid going into more debt to pay off existing debt.

“What Is Debt Settlement?”

The term debt settlement refers to programs that are offered by for-profit companies, and involve a negotiation with your creditors that allows you to pay a “settlement amount” to resolve your debt. This settlement is basically another word for a lump sum that’s agreed upon, and generally is much less than the full amount owed. However, buyer beware, these settlements can leave a mark on your credit score and financial record.

Feeling like you’re drowning in debt can be a paralyzing experience, and often we jump at the first quick fix we come across to alleviate the stress. However, when it comes to debt, the important thing to remember is that there is no short term solution. Before you decide on which options are best for your financial future, make sure you understand any repercussions and liabilities that may pop up and consider options like refinancing with your mortgage before signing any settlements or new payment plans. If you have any questions about managing your debt and how you might be able to use your mortgage as a tool to alleviate your debt, please don’t hesitate to call me at 705-315-0516. I am always happy to assist you and to help you better understand and plan for a stable financial future.

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