The Difference Between Credit Negotiation and Consolidation

If you have issues with debt and creditors, you have probably spent one or two sleepless nights worrying about paying back your minimum payments on time or avoiding answering the phones, checking you Caller ID to see if it is friend or foe on the other end before picking up. In order to manage your debt, you may have considered two different types of credit management services: debt consolidation and debt negotiation. The difference between these two options is striking and can have a profound impact on your credit rating and your credit future.

Debt Negotiation

Debt negotiation is a solution for those who are struggling with credit issues and no longer have sufficient credit or income to justify the simpler debt consolidation option. It entails contacting your various lenders and convincing them to modify the terms of their loan to you to lower either the balance due (settling for less than you owe), or lower the interest rates, or possibly accept a single, fast, up-front lump sum and competing the obligation. This is best handled by a professional debt management company, as most creditors are much more likely to accept negotiations from them due to long-standing relationships than they are to accept negotiation from the borrower. Debts have been settled this way for as little as $.50 cents per dollar owed. The downside to a debt negotiation is that the lender will usually report on your credit your inability to pay your debt as agreed by the original contract. This is damaging to your credit score, but not as much as a bankruptcy would be, which is the appeal.

Debt Consolidation

A debt consolidation is the taking out of a new loan, either through home equity, or perhaps a new credit card or personal loan, in order to pay off many other smaller loans that you have. This route of debt management does not require the approval or assistance or agreement of your current lenders and instead of having a negative effect on your credit report as debt negotiation is likely to do, it may have a beneficial effect on your credit. This credit improvement is due to the debt/available credit ratio that is factored into your credit score. By taking out a consolidation loan you are increasing your total available credit and decreasing the percentage of total debt you have to your total available credit.

Debt consolidations are superior in how they treat your credit but they cannot be managed by everyone. For one thing they usually require that you still have a relatively good credit score, so it is a route that you must take early on in your debt troubles before your struggles cause damage to your credit score and you are unable to get a loan. The easiest type of debt consolidation loan to get is the home equity loan, but that is not an option for many people as well, as they are either not homeowners, or do not yet have enough equity in their home to justify a loan from a lender.