Chuck Bentley: Debt Consolidation vs Debt Settlement

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Dear Chuck,

My wife and I are working really hard to get out of debt. We are overwhelmed with 5 credit cards, 2 car loans, student loans for both of us, a mortgage, and furniture that we financed. We now clearly see the mistakes we made and the dangers debt can present. I’ve been doing some research to figure out the best way for us to pay off the debt without going bankrupt and am confused between debt consolidation vs debt settlement. Can you explain and recommend which is best?

Drowning in Debt

Dear Drowning in Debt,

I am so sorry for the pain and stress you are experiencing. That kind of financial burden can be crippling and have devastating effects on your health, relationships, and financial future. My wife and I suffered under crushing debt early in our marriage so we are compassionate toward those who have made similar mistakes.

The good news is that you CAN work your way out of this. Debt consolidation and debt settlement options are tempting because they seem to lance the pressure. But, I do not recommend either one. Here’s why.

Debt Consolidation

This is a process where debts are combined into one loan, making it easier to pay one bill than several. But it has some major drawbacks:

  • There is no guarantee that your overall interest rate will be lower
  • Your interest rate is influenced by past payment history and credit scores
  • They promote low interest rates but usually increase them after a period of time
  • Even though your debt is restructured and your payments are lowered, the term of your loan is lengthened, so the total amount you pay will be greater
  • It will not work if there is too much debt or if you continue to accumulate debt

Other Forms of Debt Consolidation:

1. Transferring Your Balance

Transferring your balance on a high-interest credit card to a low-interest credit card can be an option, but only for those with excellent credit scores (above 700). Again, even this option comes with hefty drawbacks: you may be charged a fee of up to 5% of the balance, you cannot miss or fall behind on any payments, and interest kicks in after 12-18 months. You can read more about it here.

2. Personal Loans

Personal loans via banks, credit unions or online lenders charge a lower fixed rate than credit cards. Origination fee, prepayment penalty, and collateral (home or car) may be involved. Your new loan will have a fixed interest rate and a fixed monthly payment.

3. Home Equity Loans

Home equity loans are secured by your house. The danger with these is that you could lose the house if you don’t keep up with the payments. They typically have lower interest rates than an unsecured loan and do not require good credit, but repayment terms can be 10 years or longer.

Click here to read more.
Source: Christian Post