If you are someone who has fallen behind on the past few payments and is having trouble paying back debt, this article is for you.
Although an effective way to deal with debt, most people aren’t aware of the concept of debt settlement or are too scared to use it. Most commonly used by financial advisors to help reduce their clients’ debt, debt settlement is specially designed to help people struggling with debt.
However, just like every other solution to your financial problems, debt settlement also comes with its own set of advantages and disadvantages. These pros and cons need to be carefully considered before making your decision as they can severely affect your financial well-being.
That’s why in this article, we are going to tell you all about what debt settlement is and what are its pros and cons to help you make a more informed decision.
What is Debt Settlement?
Under debt settlement, a borrower negotiates with their creditors in an attempt to settle their debt. This usually happens when the borrower is willing to offer a lump sum payment that is less than the complete owed amount. Not only does this allow the borrower to settle their debt more easily but also reduces the burden on the creditor. However, for a debt to be considered settled, it is essential for both parties to agree to the terms and conditions.
While debt settlement can be carried out by the borrower themselves, most people prefer working with a debt settlement company or attorney to negotiate on their behalf. In this case, the borrower makes the lump sum payment to the attorney who pays it to the creditor on behalf of the borrower.
While debt settlement might seem like a simpler option to get out of debt for people facing financial trouble, in many cases, it can lead to negative effects. Moreover, some negotiators may charge you fees for the settlement process which can be an extra cost. That’s why it is essential to be aware of all the pros and cons of debt settlement before entering a debt settlement agreement.
Let us find out some of the most common advantages and disadvantages of debt settlement below:
Pros of Debt Settlement
- Reduced Debt: When it comes to debt settlement, if done correctly, you can significantly reduce your total debt. This is especially beneficial for those who are burdened with debt and unable to pay it back.
- Helps Avoid Bankruptcy: Declaring bankruptcy is most commonly viewed as a last resort. However, debt settlement is almost always a better option as bankruptcy can lead to loss of assets, a severely damaged reputation, a low credit score and the inability to acquire loans in the future. Thus, by opting for debt settlement, you can avoid the consequences of bankruptcy and improve your creditworthiness for the better.
- Better Flexibility: By getting rid of debt, a borrower can reduce their monthly expenses and achieve greater flexibility in their monthly budget. This not only provides relief from the extra burden of debt but also allows the borrower to make ends meet more easily.
- Faster Debt Repayment: With the help of debt settlement, the borrower can become debt-free faster and reduce the burden of debt sooner. Not only will this provide a greater level of financial security but it will also help the borrower improve their lifestyle.
- Better For Your Credit Score: By settling debts successfully, borrowers can improve their credit scores and increase their creditworthiness, or at least avoid further damage. Not only does this increase the possibility of securing a loan in the future but also results in better financial stability.
Cons of Debt Settlement
Now that you know all about the pros of debt settlement, it’s time to consider its cons.
- Negative Impact on Credit Score: Although the negative impact that a debt settlement can have on your credit score is lower than declaring bankruptcy, it will still take its toll. Despite the debt being marked settled, it can reduce your credit score by several points, which can take a few years to recover from.
- Legal Consequences: Attempting debt settlement tells your creditors that you may not be able to pay back your loan in full. This can not only lead to more pressure from the creditors but also legal actions in an attempt to recover the outstanding loan amount. It is therefore crucial to speak to a professional ahead of making any decisions
- Extra Fees and Hidden Charges: A debt settlement company can try to charge you more than you save on your debt in the name of fees and other costs.
- No Guarantee of Success: Debt settlement is not necessarily always successful and creditors are under no obligation to allow it to happen. This can result in outstanding debt despite paying the debt settlement company.
Furthermore, it also reduces the creditors' trust in your creditworthiness, making it difficult for you to secure another loan in the future.
Choose Salad Money for Fair and Affordable Personal Loans
Now that you know all about the pros and cons of debt settlement, you can make a more informed decision regarding the concept.
However, if you ever find yourself in need of emergency money or a personal loan to consolidate your debt, you can rest assured that Salad Money is here for you.
With our More Than Your Score loans, we aim to provide fair personal loans to employees who have been wronged by the credit score system.