What is debt consolidation?
Debt consolidation is where you merge multiple debts into one loan, meaning you’ll only have one monthly repayment to make.How does debt consolidation work?
Over time you can build up a number of debts with varying interest rates, such as a mortgage, credit cards, store cards, overdrafts, and personal loans. When this happens, it can be difficult to manage the repayments of these debts. By remortgaging, you could consolidate all of these different debts into one lower monthly payment. This will give you a single interest rate, recurring repayment, and a clear loan term. However, whilst reducing your monthly payments might seem ideal, it could mean that you pay more in the long term. That’s why it’s essential to discuss your options with one of our professional advisers before you make your decision.The benefits of debt consolidation
Advantages of debt consolidation include:- Pay one low interest payment per month instead of multiple payments.
- Reduce interest rates on credit cards, store cards, overdrafts and loans.
- Easier debt management.
- Your credit rating is unaffected.
Disadvantages of debt consolidation
As with any type of loan, there are some disadvantages to debt consolidation you should consider before applying:- If the loan is secured against your home, your property may face repossession if you fail to keep up with your payments.
- There might be upfront costs.
- You could pay more in the long term.
What is debt settlement?
Debt settlement is an agreement between a lender and borrower to pay back a portion of what you currently owe, with the promise that you’ll pay the amount ‘settled’ for in full. Depending on your personal circumstances, debt settlement offers might range from 10% to 50% of what you owe.How debt settlement works
Debt settlement is a service offered by third-party companies that contact your creditors on your behalf to negotiate a better payment plan, settle, or reduce your debt. These companies usually charge a fee, which is often a percentage of the amount you’d save on the settled debt. Whilst the debt settlement company is negotiating, they may ask that you make regular deposits into an account that’s under your control but is administered by an independent third-party. They could also advise you to stop paying your creditors until a debt settlement agreement is reached.How does debt settlement affect credit score?
When a debt is settled, your credit report will show the transaction in question with a status of “settled” or “paid settled”. Though a “settled” status might seem better than an “unpaid” status on the surface, any payment status other than “paid as agreed” or “paid in full” can damage your credit score.Advantages of debt settlement
Here are some benefits of debt settlement:- Avoid bankruptcy
- Repay your debts in less time
- Relief from overwhelming debts
Disadvantages of debt settlement
There are also a number of drawbacks of debt settlement, including:- Affects your credit rating
- Creditors aren’t guaranteed to accept debt settlement offers
- You need a lump sum of cash to repay the loan if a full and final settlement offer is accepted.
