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.