If you’re deeply in debt, shouldn’t ‘settlement loans’ help you? Not necessarily, experts say
Dubai: It is often seen as the last resort for someone deeply in debt to settle their debts by negotiating and agreeing with the creditor to accept less than the amount owed in full payment.
If you’ve taken on more debt, you’ve also been frequently contacted by debt collectors wanting a timeline on when you’ll pay your arrears.
If you don’t want them to keep harassing you for overdue money and worry about being sued for debt, “debt settlement loans”, also known as “debt relief” or “debt adjustment”, can help you.
What is meant by “debt settlement” or “debt negotiation”?
Debt settlement, also known as debt negotiation, involves clearing debt by paying off a portion of it in a single lump sum.
What does a “debt settlement” agreement mean for the borrower and the lender?
How does the borrower benefit from such an agreement? A debt settlement agreement can provide the debtor with financial relief and put them on the path to rebuilding a damaged credit history.
Meanwhile, a debt settlement loan agreement allows creditors to receive at least some of the money owed to them rather than no money at all.
Also, it may mean that the borrower can avoid filing for bankruptcy. Although, according to some credit experts, filing for bankruptcy may be the best alternative in some cases.
Although it sounds like a good deal, debt settlements can be risky because such loan deals can irreparably damage your credit.
Moreover, reaching a settlement can take a long time, often between two and four years. This can be expensive if you use a debt settlement company, as you will pay fees. So it’s a last resort.
How much will a debt settlement agreement cost you?
Once you have chosen a debt settlement company, find out how much they charge to settle your debts with a loan agreement. However, provide transparency and ensure that the company does not sidestep your cost questions.
Debt settlement companies typically charge a 15-25% fee to settle your debt; it can be a percentage of the original amount of your debt or a percentage of the amount you have agreed to pay.
Let’s say you have a debt of 100,000 Dh and you settle for 50%, or 50,000 Dh. On top of the Dh50,000, you may be required to pay an additional Dh7,500 to Dh12,500 in fees to the debt settlement company – which, while significant, will seem worth it to those desperate to close their exorbitant loans.
The Risks of Debt Settlement Outweigh the Benefits
Although settling a debt through a debt settlement company can reduce the amount of your debt, relieve creditors and debt collectors, and even help you avoid bankruptcy to some extent, it There are risks that can easily outweigh the benefits.
If you’re deeply in debt and looking to settle your loans, a major risk you don’t consider is that your creditors might not agree to negotiate or settle with your debt settlement company.
This means that there is no guarantee that the debt settlement company will be able to come to a settlement for all of your debts. Moreover, there have been several reports that some creditors even refuse to negotiate with debt settlement companies.
Can I be charged a fee by my debt management company even if all of my debt is not settled?
If you stop making payments on a debt, you may end up paying late fees or interest. So while your debt settlement company takes an extended period of time to negotiate a lower debt with your creditor, late payment fines will pile up — not to mention countless calls from debt collectors.
Keep in mind that debt settlement companies cannot collect fees until they have entered into a settlement agreement, you have accepted the settlement, and you have made at least one payment. to the creditor or debt collector as a result of the agreement.
But you could still end up paying part of the debt settlement company’s full fee on the rest of your unsettled debt, experts reveal. If you have five or six creditors and the company settles any of those debts, they may start charging fees as soon as they receive a result.
If a debt settlement company has settled a proportion of your total debt listed in their program, they may charge you for that same proportion of their total fees. Suppose your total debts are Dh100,000 and Dh50,000 of the total amount has been settled, you may be charged 50% of the total agreed fee.
Another key risk: any delay in negotiating a debt settlement could negatively impact your credit score
A debt settlement company can encourage you to stop paying your debts while you save money for a lump sum payment.
But at this point, your creditors may not have agreed to anything, which means all those missed payments may end up as overdue accounts on your credit reports.
Your credit ratings could be affected as a result of any overdue payments, and the creditor could also send your account for collection or sue you for the debt.
So coming to a debt settlement loan deal with a company that specializes in negotiating them should basically be your last resort. So always look for alternatives to debt settlement.
Key points to remember
Before approaching a debt settlement company, credit experts advise you to first try to negotiate settlements yourself with credit card companies or other creditors. Offer an amount you can pay immediately, even if it’s less than you owe.
If you have credit card debt, consider a balance transfer. A balance transfer is the transfer of debt from one credit card to another, usually to take advantage of a zero rate introductory offer on the new card.
Balance transfer cards have zero percent introductory rate offers for a specified period of time and may charge a flat fee or a percentage of the amount you transfer. But check to see if you’ll pay more money on interest payments on your current card than the cost of the balance transfer fee.
And you should also try to pay off the balance before the card’s promotional period expires to avoid paying interest on your balance. There are other debt relief and management options if you can’t get a large lump sum to pay the debt settlement or if the credit card company won’t negotiate a settlement.
You can also attend debt counseling sessions to deal with this situation. By talking with a credit counselor, you can explore your options. But if you opt for these settlement services, the debt management programs are structured to reduce the debt ratio of the borrower.
(The debt-to-equity ratio is the ratio of the total amount of monthly payments or credit card, loan or other monthly repayment commitments to an individual’s total income.)
Moreover, the negotiation skills of the experienced mediators of a debt settlement company certainly provide an added advantage.