Distinguishing Between Debt Consolidation and Debt Settlement

Americans are still finding ways to deal with the recent economic crisis.  To get out debt, some people seek credit counselling 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.

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