Debt Consolidation Vs Debt Restructuring

When it comes to dealing with your debt, you can take many different approaches. We compare two of those paths below: best debt consolidation loan and debt restructuring.

Here are the main differences between such approaches. Understanding these differences can assist to determine the best option for the situation.

What’s the definition of a debt consolidation?

In simplified terms, best debt consolidation loan is the process by which one turns many separate debts into a single kind of debt. In doing so, one eliminates the stress of having to make numerous varied monthly payments. With any luck, one would also lower the amount one pays on the debt, both now as well as an overall.

There are various kinds of different forms of debt consolidation. They usually all accomplish the same goal however do so through different means. The most common types of debt consolidation are: 

• Debt consolidation loans
• Balance transfer credit cards
• Debt settlement

Debt consolidation loans

Debt consolidation loans are by far the most famous as well as generic forms of debt consolidation. They are likely what comes to mind when one thinks of debt consolidation loans.

With debt consolidation loans, one must take out a personal loan that is large enough to pay off all of your other debts at once. You pay off those debts with this loan, which essentially rolls the debts into the new loan. Then, you focus on paying down the loan.

Ideally, a best debt consolidation loan usually accomplishes a few varied things. Most obviously, it should enable them to pay off several of the other kinds of debts at once as they consolidate them into a single kind of loan. 

In the best-case scenario, it also provides a reduced rate of interest as well as more forgiving terms than the original debt one is consolidating. In such a case, one should see monthly payments come down, also one should end up paying less interest on the debt over time.

Balance-transfer credit cards

By utilizing such an approach, not only do one consolidate debt, however one would also essentially stop the clock on the debtor’s interest, enabling them to get out of debt much easier and faster.

Debt settlement

Debt settlements can be the most difficult form of debt consolidation loan to comprehend as it is varied from most other forms of consolidation. Nonetheless, when done appropriately, it usually accomplishes the same goal as the other kind of methods of consolidation.

With debt settlement, one would work with a professional debt settlement company that usually acts as a negotiator. It is a buffer between them and the creditors. Instead of paying creditors, one would pay into an account managed by the debt settlement company, critically consolidating the debt payments into a single payment.

The creditors would eventually dislike that one has stopped making payments to them.

After some time, one should have a considerable amount of capital in the savings account managed by the debt settlement company. At this point, the debt settlement company will eventually spring into action by approaching the creditors along with asking them to take a lump-sum payment now while forgiving the rest of such debt.

For creditors, saying “yes” to such a proposal is frequently an easy and flexible decision. Instead of availing nothing and highly devoting resources to harassing them, they can take a lump settlement along with putting the whole ordeal behind them. One might be surprised how many creditors take the ordeal.

Note that numerous other kinds of debt consolidation exist, as well as the plenty of companies say they provide debt consolidation services. If a person is interested in pursuing debt consolidation, always ensure to do the research and consult with a professional prior to deciding how to go about it.

What’s the definition of debt restructuring?

When done appropriately, debt restructuring accomplishes numerous kinds of the same things that debt consolidation does. That is also because so many people tend to confuse the actual two concepts.

Like debt consolidation, debt restructuring can get the following: 

• More forgiving terms on the debt
• Improved interest rates
• A manageable path toward a debt-free life.

With debt restructuring, one must focus on renegotiating the terms of a single debt directly with your lender. By restructuring the debt, one must make it easier to pay off.

Why would lenders entertain this type of renegotiation? 

After all, one must already require to pay down the debt on terms that are more likable to them. Thus, why would one agree to take less?

Lenders usually agree to debt restructuring when the borrower doesn’t seem to have various other kinds of options. For instance, the borrower might be potentially on the verge of bankruptcy. The lender already checks the reality along with realizing that unless it restructures the debt, it is highly unlikely that it will further continue to receive payments from the borrower. 

What’s the difference between debt consolidation and debt restructuring?

After understanding the definitions of debt consolidation and debt restructuring, one must compare and contrast such approaches as well as how they apply to various situations.

Many debts versus a single debt

One of the most obvious differences between debt consolidation as well as debt restructuring is the intent. 

By definition, debt consolidation loans tend to focus on various debts at once. It tends to promote the goal of making the debts more manageable by attempting to consolidate them into a single debt instrument. 

On the other hand, debt restructuring generally focuses on a single debt, although one could conceivably restructure various different debts at the same time. 

A simple financial move versus a negotiation

Debt consolidation loan is understood as one can do on their own. While it frequently makes sense to work with a professional who will in turn work with the creditors in such a process, it’s not a need. It is possible that one would find a solid debt consolidation loan to pay off all the debts on own.

On the other hand, debt restructuring is a negotiation between them and the creditors. It’s not something one can just wake up along with deciding to do. The creditors are required to be open to the process as well.

Trying to preserve credit versus limiting credit damage 

Done right, debt consolidation can be a smart move to preserve your credit. By taking out a debt consolidation loan or opening up a balance-transfer credit card, you are making it easier to keep up with your debt payments while also maintaining the health of your credit score. 

On the other hand, debt restructuring could damage the credit. That is also because it is frequently so closely tied to bankruptcy proceedings. Bankruptcy is a long-lasting black mark that can remain on the credit report for between seven as well as 10 years, depending on the kind of bankruptcy.