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How Debt Settlement Affects Your Financial Position

3 min read

People take loans to take care of their basic necessities such as house, automobiles and child’s education. These loans are provided by the banks and financial institutes which have to be paid back during a certain period of time. Due to some unpleasant circumstances, people are unable to pay their installments on time and get into financial problems. The banks and lenders keep calling these people asking for their money. Over a period of time, the amount becomes so huge that the debtor feel stressed and looks for the ways to get rid of this problem. Debt settlement is one of the best options available for such people. However, it is strongly recommended to understand the practice and its pros and cons so that you can make the right decision.

What is debt settlement?

It is a practice in which the debtor is required to pay the lump sum amount to the lender, which is less than what he owes. The third party companies work with the banks and debtors and act as an intermediate to make this “settlement” happen. They negotiate with both the parties and make the debtor pay the amount agreed upon. It is suggested to know its pros and cons because it may impact your credit scores greatly and affect your eligibility to get loan in near future.

Advantages of debt settlement

Some of the basic advantages of this practice are mentioned below:

  • You will be required paying off less amount what you have taken in the form of loan. The debt settlement companies help reduce the amount as per your capability to pay off. This way, you will get some relief and your metal stress will be reduced.
  • If you are unable to pay the loan, you will have to face bankruptcy. This practice will prevent the bankruptcy and you will be saved from its consequences to a great extent.
  • You will be able to lead a stress-free life because no more creditors and lenders will call you for payment.

Disadvantages of debt settlement

  • The creditors may not agree on the amount proposed to them. If they don’t agree, you will have to pay the entire amount including late fees and interest rate.
  • You will be required paying the fees to debt settlement companies that will work with the creditor on your behalf. This may be an additional burden on you which you will have to pay at any cost.
  • One of the worst effects of debt settlement is that your credit report will reflect the settlement. It will affect your credit history negatively. If you need any loan in the coming time, your report will be reviewed by the creditors and you may end up getting rejected. It will be hard for get any loan approved unless you have a healthy credit report.

Despite of both advantages and disadvantages, many people opt for debt settlement and get rid of the amount, which they may have to pay off otherwise. You must consider this option after assessing all of these points carefully.