| By :
Liz Roberts
Copyright (c) 2009 Liz Roberts Americans are still finding ways to deal with the recent economic crisis. To get out debt, some people seek credit counseling while others turn to debt consolidation and debt settlement. Is there a difference between consolidating and settling debts? Let's discuss the basic facts about debt consolidation and debt settlement. Two Different Debt Relief Programs Debt Consolidation. A debt consolidation is a loan that is used to pay off all existing debts from different creditors. This is done to prevent the continuous accumulation of debt due to the different interest rates and penalty fees that each creditor charges. By consolidating, a borrower can greatly reduce his/her monthly payments and pay only one rate of interest. Only unsecured debts or debts with no collateral can be consolidated. Furthermore, a debt loan consolidation is a secured loan which means the borrower must submit his/her property as security for the amount borrowed. The repayment term has also been extended with a time frame ranging from 5 to 10 years, depending on the amount loaned. Thus, despite the lower rate, the borrower is subjected to a much longer repayment period. During the repayment period, a borrower must do his/her best to submit monthly payments on time and avoid incurring new debt. Debts incurred outside consolidation can make it difficult for the borrower to manage repayment and can put you at risk of repossession. Debt Settlement. Settling debts is different from debt consolidation. Your credit counselling agency can negotiate with creditors on your behalf to reduce or bring down the actual amount you owe. Instead of paying the original amount of your debts, you will only be required to pay a certain percentage from it, giving you the chance to settle your debts once and for all. As much as 75% of your debts can be cut off with the proper negotiation. In cases where the borrower is obviously incapable of repayment, most lenders would be willing to negotiate than to get nothing at all. While this may seem like a great option, consumers must be cautious about getting help from the wrong source. Some credit counseling agencies and debt settlement agencies may try to take advantage of your situation by charging unreasonable fees for their services, when in fact, no settlement has been made at all. To avoid getting ripped off, it's best to seek help from a government accredited credit counseling agency. Your credit counselor may give you pointers on how to negotiate with creditors on your own instead of doing the negotiation for you. Speaking with your lenders about your financial state is actually the best way to deal with bad debt. However, take note that once a settlement has been agreed, your creditors expect you to submit your payment right away. Debt settlement companies usually offer loans which the borrower can use to pay off the agreed amount to be settled. If you still need to borrow money for debt settlement, see to it that you're dealing with a legitimate and trust-worthy lender.
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