Personal Finance
October 10, 2022

Best Debt Relief Companies

Many people who are in debt often don’t realize that there are services designed to help them get out of debt. Not all of these debt relief services are…

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Basic Debt Relief Questions

Debt consolidation is a type of refinancing that uses one loan to repay existing debts. Once you use a loan to consolidate your debts, you only need to make one payment per month. Many people find that debt consolidation can also help them avoid the high interest rates that come with credit card debt. Consolidation, therefore, can make it easier to repay debts quickly.

Debt settlement is used to lower the amount of money that you owe. Instead of repaying the full amount that you have borrowed, you negotiate a lower rate that helps you save money. For instance, if you owe your credit card company $25,000, you might find that the company will accept a percentage of your debt. The exact sum that you pay depends on several factors, including how much you owe, your credit score and how well you (or a debt settlement company) can negotiate with debtors.

Debt consolidation costs can vary significantly depending on how much you owe and what kind of deal you get from a debt consolidation company. Common fees charged by companies include:

  • Origination fees (or closing fees)
  • Balance transfer fees
  • Annual fees

If you miss a payment, then you will also face a late fee. Overall, you will probably pay between 4 percent to 10 percent of the amount that you need to borrow. Of course, you will also have to pay interest on your debt consolidation loan. Interest rates vary significantly from company to company.

Debt settlement companies have two ways that they can charge you for your services. One approach charges you a percentage (usually 20 percent to 25 percent) of your debt. For example, if you owe $20,000, then the company gets paid $4,000 to $5,000.

The other approach charges you a percentage of the money you save. Expect to find rates from 10 percent to 15 percent. Some people think that this payment option incentivizes companies to work harder on your behalf since they will earn more by saving you more money.

Debt consolidation loans don’t usually hurt your credit rating. In fact, they can improve your credit score, especially when you use the loan to eliminate high-interest credit card debt.

Debt settlement companies only work for people who can meet certain qualifications. Most importantly, the companies want to make sure that you can afford your new monthly repayment. If you don’t earn enough money to repay the loan, then you will need to find other ways of lowering your debt, such as cutting expenses and finding extra income.

Not everyone gets to use debt consolidation. Before you can qualify, you have to prove that you’re undergoing a financial crisis. A financial crisis could come from losing a job, unexpected medical bills or the death of a spouse.

You also need to have a certain amount of debt before you can consolidate. The specific number depends on several factors. More often than not, though, you will need to owe at least $7,500 before you can use debt consolidation.

Yes, in many cases, debt settlement can hurt your credit. In fact, it could hurt your credit nearly as badly as filing for bankruptcy. How much your settlement affects your credit rating, however, depends on several factors, such as whether you missed payments or defaulted on a loan.

Some debt settlement companies advise their clients to stop making payments. If you follow that advice, then your credit score will plummet quickly.

Debt Relief Tips

There isn’t a simple answer when it comes to choosing between debt consolidation and debt settlement because each person has a unique set of concerns to think about. You can, however, weigh the pros and cons of your options to decide which one will work best for you.

The Pros of Debt Consolidation

Debt consolidation works well for a lot of people because it doesn’t negatively impact their credit scores. As far as the credit bureaus are concerned, you’re taking positive steps toward repaying your debt.

Consolidation can also help you secure a lower monthly payment. If you currently cannot afford to pay your monthly bills, then you may find that you can make the situation easier by consolidating all of your debts into one loan.

You can also save money by getting a low interest rate on the loan you use to consolidate your debts. If you have a lot of credit card debt, then you’re probably paying an interest rate of 20% or more. With such a high interest rate, you could literally spend decades trying to repay your debts. When you move those debts to a loan that has a lower interest rate, you automatically save yourself quite a bit of money.

The Disadvantages of Debt Consolidation

Despite the benefits of debt consolidation, it does have some disadvantages. For instance, you will probably have to your debt consolidation company fees that will add to your financial woes.

Even if debt consolidation lowers your monthly payments, you still have to repay the loan’s total. This means that you will still face monthly payments that can lead to financial hardships. If you’re not prepared to take on this responsibility, then consolidating your debts won’t help your situation much.

Pros of Debt Settlement

Debt settlement can quickly slash the amount of money that you owe your creditors. If you know that you will never have enough money to repay your debts, then it makes sense to negotiate for a lower amount that you can afford.

Disadvantages of Debt Settlement

Unfortunately, debt settlement comes with a lot of baggage. It can seriously harm your credit score for years to come. You may also find that you owe the debt settlement company quite a bit of money after the negotiations have finished.

Overall, debt consolidation works better for most people. There are times, though, when it makes sense to use a debt settlement so you can make a fresh start.

Some debt relief companies do great work that benefits their clients. Others have more interest in earning money from people who don’t know how to manage finances well. Follow these four tips to find a debt relief company that will work for you.

#1: Contact Your State Attorney General

Your state’s Attorney General should have a list of debt relief companies that have received numerous complaints. Avoid those that get reported often.

#2: Contact the Consumer Protection Agency

The Consumer Protection Agency also has information about debt relief companies. Use this information to avoid unscrupulous companies and focus on the ones that truly help their clients.

#3: Ask for Quotes Upfront

It’s often difficult to know how much debt relief will cost, so you should ask companies to give you upfront quotes. Compare the quotes to choose a company that matches your budget.

#4: Ask About the Companies’ Success and Failure Rates

You want to choose a debt relief company with good negotiation strategies. Otherwise, it’s unlikely that you will save much money by recruiting their help. Ask each company to give you details about their successes and failures.