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Debt Consolidation and Debt Elimination Explained

Debt Consolidation vs. Debt Elimination

Debt consolidation and debt elimination are two different strategies for people struggling to repay their debts. Whether you’re being weighed down by high interest rates or are simply in more debt than you can repay, these two strategies are options for dealing with the amount of money you owe. Before we get into the differences between the two options, it is important to understand that the primary goal of both alternatives is to make debt more manageable. Each of these options is designed to help a person get out of debt sooner, while saving money in the process. The question then becomes, which of these two options is right given your current financial standing?

Debt Elimination

Debt elimination is used as a way of settling debt. When looking to eliminate debt, some creditors are willing to accept a lump-sum payment that is less than the amount owed. During debt settlement, you (or your credit counsellor) will contact each of your creditors to negotiate a one-time payment for the amount you owe. If the offer is accepted, your debt will be considered repaid for the lesser amount. In debt settlement, you are aiming to reduce the total amount owing to your creditors. You still owe the same lenders, but you may owe them less, reducing your principal. The main drawback of settling debt is that it will hurt the debtor’s credit rating, making it more difficult to be approved for credit in the future.

Debt Consolidation

In debt consolidation, a person takes out a large lump-sum loan in order to pay off all of their existing credit or debt. By doing so, they consolidate their debts into a single monthly payment that can be easy to plan for and budget around. Debt consolidation loans are fixed loans and as a person makes their scheduled payments, the principal of the loan will go down accordingly. Debt consolidation allows a person to eliminate their debts without hurting their credit rating, making it more likely that they’ll be able to accomplish their financial goals on their own terms.
While the two options have their differences, each aim at giving a person the best chance to get out of debt as quickly as possible. Choosing the right option can be a difficult decision to make, especially if you lack the pertinent information necessary to make a wise choice. Using a Money Coach Client application, a person can assess their given financial situation to see how each potential option affects their lifestyle and monthly budget moving forward. Getting out of debt involves a commitment to loan repayment and careful financial planning. Debt consolidation is the best option for people seeking to eliminate their debts, so long as they stay on schedule with their payments.
When choosing between debt consolidation vs. debt elimination, it is important to understand the use of leverage. Securing a loan against an asset, such as your home, puts your home at risk if you are unable to make your payments. When choosing to use a home as collateral, homeowners need to be on top of their credit payments or put their home at risk, making it all the more important to have an intuitive financial plan.