Friday, 19 February 2016

What Collection Agencies Will Never Tell You

When you’re neck deep in debt, the only possible thing that you would do is to look for a way out, one of which is debt settlement wherein you ‘settle’ or pay off your debt for less than what you actually owe to a lender. While this may sound like a fantastic deal, it may not be the case in reality. There are pros and cons both to debt settlement and before you choose to avail of this option as a seemingly easy way out, stop for a moment and consider the pitfalls and consequences.
What is debt settlement?
Simply put, debt settlement involves pay off or ‘settling’ an outstanding loan or credit card amount by paying whatever is financially possible to the lender or credit card issuer. It need not be the entire amount due but in fact can be significantly lesser.
The obvious pro in favour of debt settlement is the fact that it is a one-time payment that clears off your dues that you can afford. And if the settlement proposed by you is accepted by the lender you will pay much less than what the original amount is, sometimes even as much as 50 percent less of what is owed.
There are two ways you can go about debt settlement – either you negotiate with the lender personally, or engage the services of a credit counsellor to negotiate with your creditors and find a middle path, or a mutually acceptable way out.
Debt settlement differs from debt consolidation in that with consolidation, you avail of a new loan to pay off the ones you already have. The new loan is likely to have a rate of interest lower than the existing ones and this may ease your finances considerably each month.
The negatives of debt settlement
For those who choose to go via the route of hiring the services of a debt collection agency, it is likely that the fees you pay to the agency are substantial – so not only do you wind up paying less towards your outstanding amount, but utilise that money to pay the collection agency instead.
Further, if you engage the services of a debt collection agency, you will be required to stop paying the lender or credit card company directly and instead route the money via the agency. The money is then paid out to the creditors once a sizeable chunk has been credited to your settlement account. Until such time, know that your account continues to show as delinquent and that your CIBIL score keeps plummeting until such time that the money is paid towards the outstanding amount.
Typically, debt settlement applies to unsecured loan products; hence any secured loan such as a housing or auto loan is likely not to be covered under such a programme.
When it comes to reporting this information to credit bureaus, lenders categorise these accounts as ‘settled’, instead of ‘paid in full’, unless the terms have been carefully negotiated with the lender. This can again have an adverse impact on your credit score, as a settled account is not viewed very positively – the reason being, you are paying off what you can afford and not the entire amount, which clearly signals solvency issues to a lender. Hence while you have eventually (and possibly with a lot of effort) paid off whatever you can, when you next look to avail of a loan, a lender may look at your settled account less favourably and may deny you a loan or credit card at a future date.
Further, when you are looking to settle debt, you need to pay off money in one go. So while this may mean that your financial woes ease out in two or three months, it also implies that you need to fork out a sizeable chunk of money all at one. When you are already in a financial bind 9and hence looking to settle a loan), this in itself may be difficult.
Impact of debt settlement on the credit score
Debt settlement while offering temporary relief from your debt burden in the long run can be anything but healthy. This process can often leave individuals with damaged credit scores that can take a long time period to repair, or sometimes drive them deeper into further debt.
In conclusion
However, at the end of the day if you have no option left to you but to opt for debt settlement make sure that you approach it in the right manner. If you choose to avail of the services of a debt collection agency, make sure you run a check on the agency first to authenticate that you are not likely to fall prey to a scam.
Ultimately, to stay credit healthy nothing but a new fiscal diet is likely to work in the long run. Making timely payments on all outstanding dues, staying well within the credit utilisation limits on any cards you have and not applying unnecessarily for any fresh credit can all help to boost your credit score in the long run.
Given the importance of cibil scores in today’s times, it becomes important to remain credit healthy, so that a credit solution is easily available to you when you really do require it.

No comments:

Post a Comment