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Last Updated on December 29, 2020
When you hear the term “debt relief,” your first thought is probably something like, “Yeah, that sounds like what I need right about now.” This is especially true for borrowers who have been struggling with thousands of dollars in debt, and who have been wondering how in the world they will ever pay off such an amount.
But what exactly is debt relief? While its title gives us a clue as to its goal, it’s useful to know exactly what the process entails. That will help you decide whether such relief is a viable path forward.
What Is Debt Relief?
The broadest definition of debt relief is changing how much you owe — with the overall goal of making debt easier to eradicate. There are two primary ways to go about reducing your financial burden: bring down the interest rate, or bring down the principal amount owed.
Debt Relief: Consolidation
Debt consolidation is a form of debt relief that focuses on making interest more manageable, especially when it comes to notoriously high-interest accounts like credit cards. The idea is that if interest isn’t accumulating as quickly, more of your repayments go toward servicing the actual balance. That way, you can chip away at the balance more quickly and at less total cost to you.
A few popular forms of debt consolidation include transferring balances to a 0% APR credit card, using a personal loan, or entering into a debt management program through a credit counseling agency.
There are a few pitfalls to avoid when choosing the consolidation route. The most important action to take is to carefully calculate how much you’ll pay in interest, fees, and payments if you consolidate, versus if you don’t. In this regard, your credit history will significantly impact your ability to qualify for a balance-transfer card or low-interest loan.
Debt Relief: Settlement
Debt relief is also often used interchangeably with debt settlement. It is a negotiation-based strategy that aims to help borrowers and creditors reach an agreement on past-due debts. In it, the borrower will pay a lower sum in full as soon as possible, if the lender agrees to knock off a percentage of what was originally owed. Lenders may be amenable to striking up a deal if they fear the borrower is at risk of defaulting on their account.
As MagnifyMoney outlines, debt settlement is something borrowers can choose to undertake on their own, or something they can pursue through a company. Each approach has its pros and cons. Trying to resolve debts on your own means you will not have to pay fees to a company, but you will have to handle the preparation work and negotiations on your own. Working with a company outsources many of the technical aspects of settling, but any successful settlements will result in you paying a fee to the firm that handled the negotiations.
Undertaking debt settlement on your own necessitates finding a way to save up money to use as your leverage during negotiations. Debt settlement companies handle this by requiring enrollees to make a monthly deposit into a designated account until it contains enough funds to reasonably kick off the negotiation process.
Before deciding to pursue debt settlement with any company, know the hallmarks of a reputable program versus a scam. The American Fair Credit Council upholds its member companies to a strict code of conduct, which makes it a good resource for seeking out potential partners.
Debt relief is a broad term for changing the nature of your debts, usually by lowering the interest via consolidation or trying to reduce the actual balance you owe through settlement.