Finding ways to manage debt becomes necessary sometimes. When credit scores slip low, options for getting relief do emerge, but they vary in what’s involved.
Understanding debt consolidation versus debt settlement lets people with bad credit pick the better path based on money circumstances and what they want longer-term.
Debt piles up through everyday costs plus unexpected expenses that get charged onto credit when cash runs short. Missed payments then lead to late fees, penalties, and spiralling interest rates across multiple accounts.
Before long, monthly bills get very hard to stay current on. That constant struggle with collectors calling creates major stress that harms health and home life.
What is Debt Consolidation?
Debt consolidation brings all your debts together into one new loan. This lets you pay everything off with a single monthly bill. Here are a few popular ways folks consolidate debt:
- Take out a personal loan that gives you a lump of cash to pay off your other accounts
- Do a balance transfer to move credit card balances onto a new 0% interest card
- Use home equity to borrow against your house value and clear debts
The point of consolidating is to save on interest. Combining high-rate debts like credit cards into one loan can lower your overall rates. This helps you pay off debt faster and for less money over time.
You can keep in mind that stretching a loan over 3-5 years means you stay in debt longer versus aggressively attacking cards. Taping home equity puts your house at risk if you struggle with repayment.
What is Debt Settlement?
Debt settlement means working out deals to pay less than you owe on debts. The goal is convincing creditors to accept a smaller final payment that counts as paid in full. There are some ways people try to settle debts:
- Hire a debt settlement company to negotiate discounts on your behalf. They take a fee but handle talks.
- Work directly with creditors yourself. You can explain hardship and try to get accounts marked “settled.”
- Do a “lump-sum settlement” where you save up a large payment to offer creditors.
- Enter a structured settlement that makes fixed payments over time until the account is paid.
Settling hurts your credit initially because accounts become delinquent or close out with a negative status. But once debts show as settled, your scores can start to rebound. Just be sure any negotiations put agreements in writing before paying.
Debt settlement lets those in real hardship resolve debts they couldn’t otherwise afford. However, not all creditors will settle and saved money often goes towards settlement company fees. You can look at all options to make progress on overwhelming debt through reduced payments.
How Bad Credit Affects Debt Consolidation
You’ll likely pay more interest. Lenders view bad credit as high-risk. That means loans come with higher rates. Even a percentage point more costs thousands over a 5-year repayment.
Some lenders do give loans for bad credit to those with less credit. They charge steep fees and rates, though. You can compare options strictly by the annual percentage rate (APR) over the full loan term. Avoid deals above 15%.
Applications for loans might get denied for various reasons. Some lenders pull credit reports and see issues like missed payments, maxed-out credit cards, or a history of late fees, which can raise red flags. If there are too many warning signs, applications often get rejected. It’s crucial for borrowers to be aware of their credit health and any potential obstacles before applying.
Checking eligibility online can help applicants identify whether they qualify without the risk of lowering their credit scores due to multiple denials. Fortunately, loans for bad credit are available, offering options to those with less-than-perfect credit scores, though they may come with higher interest rates or stricter terms.
Secured debt consolidation uses collateral like a car or cash savings. This pledges an asset that the lender takes if you default. Only consider this if sure you can repay the loan. Bad credit limits the prime debt consolidation loans.
You still need a good income to qualify. Those with damaged scores often pursue credit counselling first. This can help negotiate cards and create a payoff plan. Once scores start rebounding from counselling, better consolidation options become available.
How Bad Credit Affects Debt Settlement
It helps get debts paid off now. The settlement ends collection calls and wipes out what you owe. Just expect a dip in your credit scores when accounts get “settled for less than owed” status updates.
Your scores drop when you do not pay creditors the full amounts. This looks risky to other lenders. That’s why negotiating settlements means even worse scores initially before rebounding.
Negative credit marks from settlement stay for 7 years. Having past-due and settled accounts on your credit history scares lenders off. New applications may get denied often for some time.
Your monthly bills today shrink by settling debts at 40 or 50 cents on the dollar. Just factor in any fees you may pay to a debt relief company handling negotiations. Do the savings maths before pursuing a settlement.
Debt settlement works for those who won’t realistically pay off creditors in full. However, “settled” status is worse than avoiding default altogether through debt management plans or consolidation loans. You can get out of debt without hurting your credit further, if possible.
Which is Best for Bad Credit: Consolidation or Settlement?
Consolidation helps most if protecting your credit matters right now. It keeps you current on payments and prevents further late payments. Consolidating with bad credit loans can stretch out what you owe over the years to lower monthly bills.
The settlement process offers a way to achieve an immediate reduction in debt totals, making it a popular choice for those struggling with financial burdens. By settling debts, you can have portions of your outstanding balances eliminated in exchange for affordably low lump-sum or installment payments. This can provide significant relief, especially if you’re dealing with multiple debts or high-interest loans.
However, it’s important to be aware that while debt settlement can make your financial obligations more manageable, the “settled for less than owed” status on your credit report can cause deep damage to your credit scores. This is particularly crucial for those considering loans for bad credit, as a lower credit score can further limit borrowing options or result in higher interest rates on future loans.
If your priority is short-term relief through 40% or greater savings on debts, settlement works despite the credit hit. The drop in monthly bills helps you get back on stable ground faster.
If you take the long view, consolidation loans make sense for those with some income. The default damage is avoided, and you can rebuild the credit. After a few years of on-time payments, new lending options open back up.
You can weigh if faster debt removal now is worth worse credit. Or if you can manage stretched-out repayment to improve scores eventually. You can pick what aligns best with your money situation and future lending needs.
Conclusion
Relief comes by facing the debts head-on through consolidation to combine everything under a single loan payment. Or via settlement that negotiates with creditors to slash the amounts owed by 40, 50 or even more percentage points in exchange for fixed payouts.
Each helps reduce and repay debt, but through different processes, lengths of time, impacts on credit, and risks involved if not done properly. Many advisors help assess total debt loads and create budgets that trim other costs. They can help to set feasible payment plans and negotiate some debt reductions. You can get aid in selecting between options for bad credit consumers specifically.