Debt Resolution vs. Debt Consolidation
Debt Resolution vs. Debt Consolidation
Are you feeling swamped by debt? With the average American household carrying $103,358 of debt, it's perfectly understandable. While the lack of clarity may be overwhelming, financial freedom is still achievable.
Two routes can clear your path: debt resolution and debt consolidation. However, deciding between debt resolution vs debt consolidation requires a clear understanding of each approach. Read on to learn more.
An Intro to Debt Resolution vs Debt Consolidation
To start, we’ll be covering two of the most popular financing strategies available. Debt resolution and debt consolidation are designed to help you reduce your personal debt load. However, they cater entirely different situations.
Here is a quick crash course on debt resolution vs debt consolidation so you can make an informed decision.
What is Debt Resolution?
This first strategy, also known as debt relief, involves negotiating with your creditors to reduce the amount owed.
How Does Debt Resolution Work?
You collaborate with a negotiator who assists you in developing a plan and spearheading the negotiations on your behalf. This involves setting up a payment plan and setting aside money to assist in the negotiation process.
The goal is to have a creditor agree to accept an amount less than the entire balance to consider the account paid and show a zero balance.
You can choose to do it yourself, or work with a debt settlement company that will negotiate on your behalf. For ease, we recommend working with a company specializing in this.
Why? For two reasons. First, while taking matters into your own hands sounds tempting, the right debt resolution company will offer you the necessary support. In any financial hardship, support in all aspects can make a difference.
Second, creditors may offer you a settlement directly. Usually, the offer will be in their favor through hidden fees and other penalties in the fine print.
How Does Debt Resolution Affect Your Credit?
Every positive comes with its pitfalls - it's all balance. When you work on resolving debt, it may temporarily lower your credit score.
However, understanding the possible consequences of debt resolution can help you make informed decisions and give you an advantage as you begin the process. Here are two points to keep in mind:
- Charged off accounts and settled debts
In finance, everything is documented, both positive and negative. While it’s good to tie up loose ends, remember that this note stays on your credit report for seven years.
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"Paid for less than full balance"
When you have a mark on settled debts, it can lower your credit score compared to fully paid accounts. Compared to leaving an account unpaid or struggling to pay it off, this is a better option.
Like we said earlier, this is entirely temporary. After you complete a debt resolution program, you can work towards repairing your credit score.
While debt resolution is not a quick fix, it is a solid long-term solution designed to help those in financial hardships be relieved of debt.
What is Debt Consolidation?
As the name suggests, debt consolidation is a process that combines multiple debts, usually high-interest debts such as credit card bills, into a single payment.
How Does Debt Consolidation Work?
Usually, the process of debt consolidation starts with an assessment. If this reveals that you have multiple high-interest debts and are struggling to manage your payments, consolidation can be a viable option to simplify your finances and potentially reduce your overall interest costs. There are multiple ways to consolidate debt, so the steps afterward depend on your debts and general circumstances.
You can utilize an online calculator for debt consolidation loans during research. Additionally, seeking guidance from a debt consolidation lawyer is beneficial.
While it may sound simple, this option can require you to take out a loan from entities like Discover for debt consolidation. This can become a messy process down the line, as it can roll into further and further payments.
Does Debt Consolidation Hurt Your Credit?
Yes, debt consolidation can also cause a temporary dip in your credit score.
But when might debt consolidation be promising? Mainly if you can get a lower interest rate than what you are currently paying. That will help you reduce your total debt and reorganize it to pay it off faster.
It is possible to try debt consolidation with poor credit. However, it will be more challenging to qualify for it.
Key Differences, Pros, Cons, & More
Now that we’ve covered the basics, let’s dive into more details and cover the pros and cons of debt consolidation and debt resolution.
We'll also help you determine what the disadvantages of debt consolidation and debt resolution are for the complete picture before acting.
Feature | Debt Resolution | Consolidation |
How it works? | Negotiates with creditors to pay 40-60% less than what's owed. | Combines debts into a single loan with one interest rate. |
Credit score impact | May impact your score depending on several factors. | May vary depending on credit utilization and payment history. |
Pros |
Pay less than owed, potentially avoid collections. | Simplified payments, potentially lower interest rate. |
Cons |
Not all creditors agree, creatin uncertainty when negotiating. | May not always reduce total debt paid, additional credit inquiry. |
Debt Resolution vs. Debt Consolidation: How Do I Decide?
The final decision comes down to your unique situation. When contemplating debt resolution vs. debt consolidation, there is no one-size-fits-all solution. That's why consulting with a qualified professional is essential to determine which option is best for you.
If you're interested in learning more about debt resolution, we're here to help. Contact us anytime, because at Clarity, our goal is to make your path to financial freedom as clear as can be.
Frequently Asked Questions (FAQs)
Debt Consolidation vs. Bankruptcy: Which is Better?
Again, it depends on your situation. Compared to debt consolidation, bankruptcy, while offering a fresh start by discharging eligible debts, is typically considered a last resort.
Consult with a specialist to determine the best option for you.
What is an Unsecured Debt Consolidation Loan?
An unsecured debt consolidation loan is a type of loan that does not require collateral, such as property or other assets, for approval. It allows borrowers to combine multiple high-interest debts into a single loan, usually with a lower interest rate and more manageable monthly payments.
This option is often preferred by individuals who wish to avoid risking assets or do not have collateral but have a good credit score.
What Are Revenue Streams for Debt Consolidation Companies?
Debt consolidation companies generate revenue through service fees, percentage-based charges, and other potential models.
If you decide to proceed with this option, carefully review the fee structure of any debt consolidation company before agreeing to services to ensure it is cost-effective for your situation.
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Disclaimer: This information is for educational purposes only. Consult a qualified professional for personalized recommendations.