Debt Settlement: Benefits and Dangers. Most people think that Debt Settlement is a great alternative to bankruptcy. But it’s important to keep in mind the many disadvantages that come with the Debt Settlement program. So before you start to settle your debts, it is best to do your homework and learn all about the process. Here is what you need to know.
o Debt Consolidation. This basically means you take another loan (this time a secured one) to pay off your unsecured debts. Sounds good, right? Well, there are some major disadvantages to Debt Consolidation. If you don’t own your own home, you can’t consolidate your credit card debts because they are not considered secured debts.
o Credit Repair. It is a fact that if you decide to go with a debt consolidation loan, you will have to undergo credit repair. But since you only owe one large amount and not so many different loans, you won’t be able to get too many lower interest rate loans to pay. This can lead to your credit score going down slightly, but you can recover from this damage by taking out a new loan and paying it off.
o High interest rates. Debt Consolidation loans come with very high interest rates. The reason for this is because they have a shorter term than the other forms of loans, thus they have a higher rate of interest to charge.
o No exit strategy. You can’t just say that you’re going to stop paying your debt after a certain period of time. There will be no such thing as an ‘end to debt’ or a ‘stop-smoking’ strategy. In addition, settling your debt can put you at risk of getting a legal notice for not paying your debt. In such cases, you can either hire a lawyer or just settle for a lower sum than what you actually owe. These disadvantages notwithstanding, debt settlement can still prove to be beneficial, if handled properly.
o No reduction in your credit score. Settling doesn’t necessarily wipe out all negative entries on your credit report, just like consolidation does. And since settlement is considered as a fresh loan, your credit score will likely get worse before it gets better. That’s why many people who use this method don’t even bother to know about their credit score beforehand. And the ones who do, only to end up getting a lower credit score than what they were before using this option.
o Time consumption. The biggest disadvantage of this option is that it can consume a lot of your time and effort. As the name suggests, settlement deals with creditors and the negotiation takes place between you and them. Most people find this pretty difficult to engage in. It can also be hard to keep track of numerous documents and constantly stay informed about your financial situation.
o Difficulties finding the right settlement company. If you are dealing with a credible debt settlement company, then you won’t have much trouble finding a good negotiator for the job. But since settlement deals happen quickly, you might end up with poor quality service. Some fake companies take advantage of desperate debtors by charging them huge fees for negotiating with creditors. So make sure you work with a settlement company that has been in the business for quite some time now.
o Credit score impact. If you have a good credit score, you can benefit a lot from settlement. By negotiating at least some of your debt, you will get your credit score to go down significantly and you will easily qualify for affordable debt loans in the future.
But the biggest drawback of this process is that you have to pay money to a settlement company every month. It’s understandable that you might be under financial stress at this point. But don’t forget that you are still responsible to your creditors after you settle your debt. So if you default on your payments, you will hurt your credit score even more and your creditors will be harsher on you. This is why you need to carefully consider all these things before signing on the dotted line.
Debt settlement is definitely one of the best ways to get out of debt fast. But as with anything in life, you get what you paid for. You need to think hard about the disadvantages before signing on the dotted line. Take note that there are many advantages to settling your debts. It’s just that you also have to think about the pitfalls so that you don’t get burned.
