One problem, many solutions

When you find yourself in debt, there are many possible solutions to your financial problem. Two of the most popular ones are debt consolidation and debt settlement. Each one has its pros and cons. Which solution is right for you will depend on your circumstances and personal preference.

Debt consolidation – the pros

Lower interest rates: Debt consolidation loans often have lower APRs than most credit cards. Use the loan money to pay off your most expensive debts. You can save hundreds, or even thousands, of dollars in interest payments.
Rebuild your credit history: If you can keep up with the monthly payments on your debt consolidation loan, you can use it to rebuild your credit history and improve your credit score.
Organize your finances: It’s much easier to keep track of a single monthly payment than of multiple credit card bills.
Avoid late fees: With a single monthly bill, you are much less likely to accidentally miss a payment. Say goodbye to those costly late fees.
Get out of debt sooner: Between the money that you’re saving on interest and late fees, you can be debt-free sooner.

Debt consolidation – the cons

Finding a low APR: If you’re deeply in debt, you may not qualify for a low-interest debt consolidation loan. If the interest on the loan is the same as on your credit cards, debt consolidation may not make much financial sense.
It does not reduce the debt: By consolidating your debt, you do not reduce the amount you owe.
May take longer to pay off your debt: The term of your loan can be as long as 30 years. Make sure you know how many months of those “low monthly payments” it will take to clear the entire debt.
May pay more in the long run: If it takes you many years to pay off the loan, you can end up paying much more interest in the long run. The lower the monthly payments, the longer it’ll take to be debt-free.
May lose your home: To get a lower APR on your loan, you may need to put up your house as collateral. If you do not keep up with the payments on your loan, the lender has the right to take the house and sell it.

Video: The cheapest way to consolidate debt

Debt settlement – the pros

Reduces your debt: By going the debt settlement route, you can reduce your debts by as much as 50-60%.
Quicker than filing for bankruptcy: Debt settlement is usually quicker and cheaper than filing for chapter 7 bankruptcy.
No bankruptcy on your credit report: A bankruptcy can stay on your credit report for up to 10 years, making it difficult for you to get credit even if you’ve been solvent for years. Any signs of debt settlement will be erased within seven years.
Can include medical bills in your debt settlement negotiations: It’s not just credit card debts that can be reduced. You can include medical bills over $1,000.
Stops debt collectors from knocking on your door: Once your creditors have agreed to your proposed payment plan, the collection agencies have to stop attempting to collect on those debts.

Video: Debt Settlement Pros and Cons

Debt settlement – the cons

Damages your credit score: Unlike debt consolidation, debt settlement will damage your credit score.
May be costly: While you can go through debt settlement on your own, many people choose to hire a lawyer to handle the paperwork and do the negotiating on their behalf. This can be expensive.
Creditors can say no: Creditors do not have to agree to your debt settlement proposal. They can take you to court to get their money back.
Settled debt is taxable income: The money you save through debt settlement is considered to be taxable income. Say you’ve had $10,000 of your debts dismissed by your creditors. Unless you are insolvent, you will have to pay income tax on that amount.
Easy to get into debt again: Unless you change your spending habits, you can easily fall into debt again. Debt settlement is a short-term solution. It’s up to you to stay debt-free