You might be looking to pay off your loans quickly and are considering whether a debt settlement company is the right option. Although there are potential benefits, including reducing the amount you owe by up to 50%, they’re typically only recommended as a last resort.
To understand the best option for you, knowing the pros and cons of debt settlement can help you make the right decision.
Benefits of Debt Settlement
- One lump sum: The point of debt settlement is to reduce what you owe, allowing you to pay one lump sum less than your original debt.
- Final alternative: If you’re on the verge of bankruptcy, debt settlement is a better alternative that can reduce the overall impact on your credit score.
- No more creditor calls: Constant calls, texts, and letters from credit agencies can be stressful. When you work with a debt settlement company they will typically come to a stop.
- Pay debt off faster: In cases where debt settlement works as intended, the lower payoff amount can accelerate debt repayment.
Disadvantages of Debt Settlement
- The impact on your credit score: Debt settlement companies often recommend pausing credit card payments to encourage creditors to negotiate. However, missed payments can lead to accumulating fees and interest, along with damage to your credit score.
- Pricy: Despite getting a reduced payment, debt settlement companies come with hefty fees—sometimes 15%–20% of your total debt.
- Nothing is guaranteed: Even if the debt settlement company you're working with enters into negotiations with your lender, there’s no guarantee they’ll settle. They can refuse to settle and send you to collections or even sue you, winding you up in more debt that you started with.
- It stays on your credit history: When you use a debt settlement company, it stays on your credit for seven years, with your debt being marked as “settled” rather than “paid in full.” As a result, you may face challenges obtaining new credit and could be subject to higher interest rates.
The Benefits of a Debt Management Plan
A better alternative is a debt management plan. You can enroll through a certified nonprofit credit counseling agency. You’ll work with a credit counselor, who will negotiate with your lenders to reduce your interest rate and consolidate your loans into one monthly payment, all to be paid off in three to five years. This ultimately helps you pay off your loans efficiently without damaging your credit score in the process.