How Debt Settlement Works

The current state of the economy has led many consumers deep into debt. Being that so many people now have to deal with such high amounts of debt, several options are becoming popular to deal with the dilemma. Among those options is debt settlement, if you are just hearing the term, it’s nothing new but has become a popular choice for financial management.

Debt settlement is basically the process of acquiring a single new loan in order to pay off older exiting loans or lines of credit. It is a good way to bring your out of control debt back to a manageable level, but caution should be exercised when looking into a consolidation loan since there are other options that may be more suited to your situation.

Before Initiating a Loan

If you are thinking about getting a loan to consolidate your debts, you should explore all of your options such as:

  • Working out a payment plan with your creditors
  • Using the current credit options on your account
  • Short term personal loans from friends of family
  • Working overtime to create additional income

There are also several debt counseling services that can offer you advice on restructuring you debt to make it more manageable. Often, people don’t know how to budget their expenses in a way that allows them to make their minimum payments, working with a professional to help you learn sound financial tactics should be your first resort since a single consolidation loan will often cost more in the long run even though it reduces your monthly payments and keeps you from facing collections threats.

After perusing your other options and still feel you want to take out a debt settlement loan, shop around to get the best interest rates. There are many reputable lenders that offer loans specifically for debt reduction.

Why You May Consider a Debt Settlement Loan

If you are under a lot of pressure due to mounting bills and you want to avoid filing for bankruptcy, a debt settlement loan can offer you:

  • Lower interest rates
  • Decreased monthly payment
  • Longer repayment terms
  • Clear timeline for being debt free
  • One payment monthly
  • Increased credit ratings
  • Peace of mind
  • Drawbacks of Consolidation Loans

There are a lot of benefits to entering into a loan to pay off your debts, but that doesn’t mean it’s a perfect solution. Like everything there are two sides to every coin, consolidation loans are no different. Loans are often secured which means that your personal assets such as your car, home or other valuables are used as security. If you don’t repay your loan on time, your asset will be seized without preamble. In addition to the possibility of loosing your assets, the loans are stretched over a longer period of time which means you will pay a higher amount than if you would pay your creditors directly. These loans are intended to help consumers, but the companies that offer them still operate for profit. The fees they charge are upfront and must be paid regardless of your completion of the program.