Debt Consolidation vs. Debt Negotiation: What are they?
You may have heard about debt consolidation and debt negotiation, but do you know the difference? Both are methods of handling multiple debts, but the methods employ different strategies. With debt consolidation services in Toronto, you take out one debt consolidation loan and use the loan to pay all your outstanding debts. On the other hand, debt negotiation entails negotiating with your creditors. You negotiate with the creditors and urge them to settle your debt for less than the outstanding amount. In most cases, the strategy of debt negotiation comes in handy when you are settling a significant debt with one creditor. However, it is also possible to negotiate with multiple creditors if you are dealing with multiple creditors.
When you are weighing between loan consolidation and loan negotiation, it is essential to understand the advantages and disadvantages of each method of handling debt.
The idea of paying less than you owe as provided under debt negotiation may sound fascinating. After all, who would not want to have some of their debt done away with? For many individuals, debt negotiation is an enticing option of settling a debt. However, you would be surprised to learn that countless negatives and financial misunderstandings surround the concept of debt negotiation.
How does debt negotiation work? In most cases, you will have an expert negotiating on your behalf and persuading the creditor to allow you to pay less than you owe. For instance, if you owe a creditor $7,000, you may offer to pay the creditor a lump sum of $5000. If the creditor is fine with the arrangement and agrees to take the money, you will be free. However, if you owe several creditors, you have to negotiate with every creditor, and some creditors may not agree to your terms.
The main setback of debt negotiation is the extra fee that you have to incur. For instance, while negotiating your case, the debt settlement companies may advise you to stop making loan payments. This may make you incur additional interest and late payment penalties. Given that the negotiation may take several months or years, you may incur hefty additional interest and late payment fees.
The delayed loan payment during a negotiation may negatively affect your credit history. You will also have to pay a service fee to the settlement company. In most cases, experts only recommend debt negotiation as a last resort after all other methods of handling debt fail.
Debt consolidation helps to simplify your loan repayment process because you will only have one installment instead of paying for multiple loans. With debt consolidation, you can pay lower loan installments by spreading the loan over a longer repayment period.
The main set back of debt consolidation is that your debt is not forgiven, and you do not have the option of reducing the debt. Instead, you will be taking a loan to pay other loans. If you are not disciplined enough to change your borrowing and spending habits, you will get into a similar debt problem. You may also have to repay the debt consolidation loan over a long period.