The whole process of settling massive debt is a highly stressful endeavor. Once payments due monthly are too big to handle, even a promise by the Loan Settlement Company to settle your debt at a price lower than the full price may sound like a lifeline. However, is settlement of loan really secure and what a professional settlement company really does to charge a fee? This is a major step to be taken in financial terms but it is important to understand the process, risks and the long-term effect of this step.
Debt settlement (sometimes referred to as loan settlement) refers to a negotiation in which a lending party and a borrower concurrently negotiate a reduced lump-sum settlement to resolve a debt account. It offers instant financial relief, the borrower only pays a fraction of the total balance due and the crippling burden of interest payments and phone calls are removed. It can be an essential solution in case of actual financial difficulty, e.g., loss of employment, health care crises, or the collapse of a business. In extreme situations, it may provide an escape from bankruptcy which has its own financial implications that are long term in nature.
The Trade-Off: The Impact of Safety and Credit Score
Although loan settlement is one of the quickest ways to get out of a debt, the safety issue is directly correlated with its effect on your financial profile, specifically your credit score. A settled loan is reported on your credit when compared with a loan closure where all the debt is paid off. This is a bad position, which makes the future lenders know that you failed to consider the initial terms of the loan agreement.
The end result is a sharp and severe decline in your credit rating. This bad credit may stay on your credit report for up to seven years. During this time, it will be far more difficult to get a new credit, say a mortgage, car loan or even a credit card. The lenders will consider you a risky borrower and any credit that you get will either be charged at a very high interest rate. Thus, settlement, though a secure method of getting out of the immediate debt crisis and ensuring that the collection agencies cease to harass you, is not safe to your future creditworthiness. It is always advisable to debt experts as a final option after such other options as debt consolidation or a structured repayment plan have been drained.
The Actual Activity of a Loan Settlement Company
A Loan Settlement Company is a professional who represents you and your creditors. They have the major mandate of using their knowledge and bargaining strength in order to obtain the most desirable terms of settlement on your behalf.
To begin with, the company evaluates your whole financial position. They examine your unsecured loans, including credit cards and personal loans, salary, expenses and capability to save a lump sum to settle. They then place you on a program where they usually teach you to cease all payments to your creditors and instead make a certain amount every month in a special savings account called an escrow.
The concept of this non-payment strategy is controversial because it is the action that in the first place leads to the significant drop in your credit rating, and gives the chance to earn interest and fees. It provides leverage, however. The further you lag behind, the more the lender considers the account as a loss. When the savings account reaches a lump sum of enough funds, then the settlement company starts negotiations. They are trying to persuade the creditor that it is to their advantage to take less (sometimes 40 to 60 percent of the face amount) now than take nothing at all should you declare bankruptcy.
All the communication and negotiation is handled by a reputable Loan Settlement Company which protects you against aggressive phone calls and other legal threats. They obtain a written contract with the lender of the amount to be settled. More importantly, they take you through the procedure of paying the lump-sum, and making sure that the account is recorded as being settled with a zero balance, and not just charged off. They impose a fee, which in most cases is a percentage of the debt enrolled or the amount saved but which according to the law must first be paid after an effective settlement has been made.
Conclusively, loan settlement is a potent instrument of resolving debt in the event of a financial crisis, but it has its price in terms of your credit rating of up to seven years. It is a trade-off which is calculated: short-term debt freedom (at the cost of long-term credit-building). A Loan Settlement Company must be an essential professional ally in this complicated and sensitive procedure.
Guardian Financial Experts focuses on offering expert and sensitive debt solutions. We diligently negotiate with your creditors to strike good deals with them in settling the loans which leave you on the path of economic stability again. You can rely on us to take the best care of your financial future because we have a transparent procedure and adhere to ethical practice.
Frequently Asked Questions
1. Are settled loans similar to paid off loans?
No. A paid-off loan (closed) refers to when you paid off the entire balance, which is beneficial to your credit. A settled loan implies that when you paid a loan, you paid less, which has a demerit impact on your credit score.
2. How many months will a loan settlement remain on my credit report?
The negative Settled status, that is on your report for a period of seven years after the initial delinquency, is not removed.
3. Will loan settlement eliminate all the collection calls?
Not immediately. Collection calls might come at first since you have ceased paying and a reputable settlement company will strive to control communication and stop calls in the long run after a formal agreement has been given.
4. Do you pay an upfront fee by a Loan Settlement Company?
By law, legitimate debt settlement companies cannot impose any fees to you until they have successfully negotiated a settlement with your creditor as well as a part of the debt so settled has been paid.
5. Does the settlement company solve any type of debt?
Loan settlement agencies are what usually target unsecured loans, which include credit card debt, personal loans, and hospital bills. They are usually not secured debts such as car loans and mortgages.