Debt management is an overwhelming task especially when you are already juggling between multiple creditors with multiple payments, interest rates and financial goals. It can get even worse if you are going through a financial hardship because in such a situation you can either manage your day to day expenses or save enough to pay off your debt every month. Fortunately, there are multiple debt relief strategies that can help you in financial distress.
Today we are going to talk about three of the most common strategies including; debt settlement, debt snowball and debt avalanche. Each method comes with its own pros and cons and the right decision depends on your financial situation and your ability to take risks.
Let’s break down all three strategies to help you make a more informed decision;
What Is Debt Settlement And How Does It Work?
Debt settlement is a financial strategy where you or a third party company negotiates with your creditor to reduce the total amount of debt. To successfully settle your debt, you have to pay a lump sum of the total debt and your creditor will forgive the rest. This approach is typically used for unsecured debt like credit card debt, personal loans or medical loans.
How It Works: You stop making payments to your creditor and start saving that money in a separate account. Once you’ve accumulated enough funds to pay as a lump sum, you then negotiate with your creditor to reduce the debt. If the creditor agrees, he will forgive the remaining balance and accept the lump sum you’ve offered.
Pros And Cons Of Debt Settlement:
Pros
- It will help you reduce your debt
- It’s the best solution if you want to avoid bankruptcy
- You’ll be free from your debt obligations
Cons
- It will have a negative impact on your credit score
- Not all creditors will accept your settlement offer
- Hiring a settlement company means you’ll have to pay them a fee (around 15% to 25% of your total debt)
- Your creditor can sue you
If you are facing a serious financial hardship and can’t manage your monthly payments then to avoid bankruptcy, you can choose debt settlement.
What Is The Debt Snowball Method And How Does It Work?
The debt snowball method is a strategy where you start off by paying your smaller debts first and then move towards the bigger ones no matter what the interest rates are.
How It Works: You start by making a list of your debts (starting from the smallest). You then have to make minimum payments on all of your other debts except the smallest one. Make extra payments to resolve your smallest debt first and then roll the payment from the first debt into the next smallest debt in line. This is called the “snowball effect”.
Pros And Cons Of Debt Snowball
Pros
- You get quick wins and the momentum will keep you motivated
- It helps you create a simple and easy flow without feeling overwhelmed
- When you eliminate smaller debts, it’ll give you a psychological boost and you’ll be able to resolve other debts one by one.
Cons
- Ignoring the interest rates means you’ll be slowing down your debt reduction
- You’ll end up paying more interest in this method
If you don’t know where to start from then the debt snowball method is the best strategy you can use. It won’t just help you eliminate your debts one by one but it’ll also give you the motivation and mental satisfaction you need.
What is the Debt Avalanche Method And How Does It Work?
The debt avalanche method is a more effective strategy that focuses on paying off your high interest debts first. Not only will it help you resolve your debts one by one but it’ll also help you save money in the long run.
How It Works: Make a list of your debts starting with the one that has the highest interest rate. Make minimum payments on all of your debts except for the one with the highest interest. Save money and use all the extra funds to pay off the high interest debt first. Once you’ve paid off that debt, you can then move on towards the next one with the highest interest.
Pros And Cons Of Debt Avalanche
Pros
- You can save more money on interest in the long run
- You can reduce your debt faster
- Best for financially efficiency
Cons
- If your high interest debts have large balances, it’ll feel like you aren’t making much progress
- If you are looking for early wins, this method can be a little discouraging for you.
If you are good at budgeting and financial discipline then the debt avalanche method is the best suitable option for you. It will help you minimize your total interest and you’ll eventually save money.
Best Option Overall (Financially) – Debt Avalanche
It’s obvious that you’d want to go with the best strategy among the three. Well, there’s no one answer that fits all. The right strategy depends on your financial situation, your debt, the interests you are paying and your creditor. However, in our opinion, the debt avalanche method is the most viable option especially if you can manage to make your monthly repayments. This strategy is used by those who are finding it difficult to manage their multiple debts.
Why Is It The Best?
- It will help you save more money in the long run
- If you are dealing with multiple high interest debts, it’ll help you pay them off faster
- It won’t damage your credit score like debt settlement
- If you can manage to make consistent payments then this strategy is the best suitable option for you. It won’t give you the mental relief of “quick wins” but at least you’ll be getting rid of all your high interest debts.
Debt Settlement Should Be Your Last Resort
Even though debt settlement is a great debt relief strategy for those drowning in debt, it should still be used as a last resort. The problem with debt settlement is that it will negatively impact your credit score and it’ll stay on your credit report for 7 years. Moreover, you’ll be in a constant state of mental stress because you never know if your creditor will accept your settlement offer or not. Also, in a debt settlement, your creditor can sue you anytime which is another huge risk.
You should only opt for debt settlement when you are in financial distress and even managing your day to day expenses is getting difficult. If that’s the case and the only other option you have is bankruptcy then yes, you should choose debt settlement. It’s best to use professional debt settlement services for best results!
Overall Verdict
When it comes to tackling debt, there’s no one-size-fits all answer. To make the best decision for your financial wellbeing, you have to consider your financial situation first. If you can manage to make monthly payments then debt avalanche and debt snowball are the best options but if you are already behind on your payments and don’t have enough funds to pay your creditor every month then debt settlement is the better option. To make a more informed decision, you should contact a financial counselor and seek professional consultation. Not only will it help you sort your finances and debt, in fact, it’ll also help you learn how to budget and to make an emergency fund to avoid future loans.
FAQs
Q1.Which Debt Repayment Strategy Will Help Me Become Debt-Free Faster?
The debt avalanche method is the fastest strategy that’ll help you target all your high interest debts first. You’ll save a lot of money on interest in the end and eventually you can use it to pay off the rest of your debts.
Q2.Which Method Can Help Me Improve My Credit Score Faster?
Both the debt avalanche and debt snowball methods can help you improve your credit score faster. When you make timely payments, it’ll reflect on your credit score and it’ll also help you keep your credit utilization ratio low. On the other hand, debt settlement will negatively impact your credit score initially. The impact is due to your missed payments. You can improve your credit score later by showing a financially responsible behavior.
Q3.Does Debt Settlement Always Work?
No, debt settlement doesn’t always work and you first need to ensure that you do qualify for this strategy. Even if you do, there’s no guarantee of any outcome because your creditor isn’t legally bound to accept your settlement offer. Even if you hire a professional debt settlement company, there’s no guarantee if the creditor will agree.
Struggling with debt management and don’t know where to begin from? Try Mountains Debt Relief to find out the best solution to your debt-related problems. Contact Now!