Debt Settlement Versus Secured Debt Consolidation

Debt relief often occurs through either debt consolidation or debt settlement. Debt consolidation entails you obtaining either a secured loan or an unsecured loan to finance multiple high-interest debts. Debt settlement involves paying less toward each debt balance and eliminating all debts in a short time.

Secured loans for debt consolidation usually involve either home-equity loans or cash-out refinancing. Home-equity loans provide you with lump sum payment to fund debt consolidation. This secured loan carries a low interest rate and monthly payments. However, most home-equity loans carry a 15-year term, which extents the repayment period and increases costs of paying off debt.

A cash-out refinance is similar to a home equity loan, except that most entail a 30-year repayment period because you roll debt into your home mortgage. Debt consolidation carries risk when you leverage your home against credit card debt.

Using a secured loan for debt consolidation means that you’ll significantly extend the repayment period, which extends your interest payments creating additional costs. Debt settlement can help you avoid expensive debt consolidation loans.

Debt settlement companies work on your behalf to relieve debt by entering into negotiations with your creditors to reduce your debt by 40 to 60 percent. This reduction means that you’ll pay off all debts at about 50 cents on the dollar.

Debt settlement, unlike debt consolidation, gives you authority over your finances. You have input on the amount and terms of repayment. Debt settlement allows you to repay debt at you own pace according to your financial ability.

With debt settlement, you eliminate debt faster because you only pay about half the original amount of debt. Debt consolidation requires you to pay the entire debt principal plus interest costs to the lender.