Debt Consolidation vs Debt Payoff: What’s the Difference?

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If you are considering debt consolidation or debt repayment, make sure you understand the difference between these similar-sounding options. (iStock)

Debt can keep you awake at night, especially if you owe multiple creditors. If you have credit card debt, medical bills, or outstanding loans, keeping monthly payments can be overwhelming. If you are interested in paying off debt by bundling it together – also known as debt consolidation – you can consider personal loan.

In fact, one of the most common reasons why borrowers take out personal loans is to consolidate debt. This is a reliable option, but when researching ways to pay off the balance, it is easy to confuse debt consolidation and debt repayment.

Whenever you are considering getting a personal loan, you will always want use a website like Credible to compare rates and lenders to make sure you get the best deal. Credible can help you lower your interest rate, provide estimated monthly payments, and more.

Debt Consolidation and Debt Repayment: What’s the Difference?

While these conditions may seem similar, there are significant differences between debt consolidation and debt repayment that can affect your credit rating… With this in mind, it is important to read the fine print and understand the terms of each so that you don’t run into financial trouble.

Debt Consolidation

In debt consolidation, you get a loan from a bank, credit union or online lender and use the borrowed funds to pay off as much of the outstanding debt as possible. Instead of making payments to various lenders, you will be making payments to your lender.

One of the main benefits of getting a personal loan for debt consolidation is possibly the right to a lower interest rate. For example, according to The federal reserve, the average interest rate on an individual loan is 9.65%, which is lower than the average interest rate on a credit card of 14.65%.

You can visit Credible to explore your personal loan options and compare rates and lenders.

5 DIFFERENT TYPES OF PERSONAL LOANS YOU SHOULD CONSIDER

If you can lower your interest rate, your payments may be lower, leaving more money in your budget. Or, you can keep the payment amount the same and pay off the debt faster thanks to the lower rate.

Loan calculator Credible can help you understand exactly how much a loan might cost you. you also can calculate numbers using free online tools Credibleincluding a price list that allows you to find a lender that meets your personal financial needs.

HOW TO GET A DEBT CONSOLIDATION LOAN WITH A BAD CREDIT

Amortization

While you can try to do it yourself, debt settlement usually involves hiring a third party company that contacts your creditors and tries to negotiate a smaller lump sum on your behalf. These companies charge 15 to 25% of the original amount when paying off the debt.

But before negotiating, you must stop making payments for at least 90 days, which will damage your credit and FICO rating. At the same time, late fees and interest continue to rise. During this period, you can expect to receive threatening letters and phone calls from creditors.

Most debt settlement companies require you to regularly transfer funds into an escrow account until you have accumulated a sufficient amount to settle. An independent administrator is monitoring this account and will likely charge for this service.

While it is possible that your debt can be reduced, there is no guarantee that your creditors will accept a lower lump sum. Thus, you may end up owing much more than when you started due to interest and fines. If your debt is paid off, the IRS treats the forgiven amount as income and is therefore taxable.

For these reasons, a personal loan may be a better and less risky option. If this option seems more appealing to you, head over to Credible, where you can learn more about debt relief options and what works best for your financial situation

9 BEST DEBT CONSOLIDATION COMPANIES

What happens if I sign up for debt repayment instead of debt consolidation?

If you find that you have signed up for a debt settlement rather than a debt consolidation, terminate your agreement with the debt settlement company in writing as soon as possible.

You are entitled to all funds held in escrow as well as any accrued interest. You can then contact your creditors and inform them that you have terminated the agreement and will handle the debt yourself. You can also search non-profit credit counseling to help you manage your debt.

HOW TO FIND THE BEST PERSONAL LOAN FOR YOUR NEEDS

How can I recover my loan?

If you are applying for a loan with a bad credit history, you will most likely be rejected or forced to accept a high interest rate. Credit recovery may seem daunting, but it can be done in a few steps:

  1. Pay bills on time and don’t miss out on payments.
  2. Check your credit report. IN Consumer Financial Protection Bureau recommends checking your credit report at least once a year and reporting any inaccuracies that could negatively impact your score.
  3. Keep track of your loan utilization rate. Even if you have a high credit limit, it is in your best interest to use less than 30 percent of what is available to you.
  4. Consider a secured credit card. This account requires a cash deposit which acts as your credit limit.

If you are ready to restructure your debt, a personal loan offers a way to debt consolidation without the potential pitfalls of debt repayment. Get started on your app today.

SHOULD I USE A PERSONAL LOAN FOR A DEBT CONSOLIDY?

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