Debt Snowball vs Debt Relief

A brief comparison between a debt snowball and debt settlement

The main thing a debt snowball has in common with debt settlement is that they are both designed to get you out of debt. Although, there are other similar components, there are more differences than similarities between these two debt dealing methods. For starters, you can apply a debt snowball to secured debt, i.e. auto loans, second mortgage, etc. as well as unsecured debts such as credit cards or private student loans. Debt settlement can only be used to get out from under unsecured debts. Debt settlement will save you more on unsecured debts than a debt snowball, so another possible option is debt settlement for your unsecured debts and a debt snowball for secured debts. Again, which one you use or whether you mix them will be determined on some factors.
If you are able to afford your minimum payments as well as have the ability to pay a little extra, a debt snowball may be all you need to do to get out from under your debt and ultimately achieve financial freedom. If you do not have the where-with-all to even make your minimum payments, then deciding between debt settlement or a combination of debt settlement and debt snowballing is more likely. There are, however, instances where you need a more drastic means of gaining debt relief. This is where chapter 7 bankruptcy may be an option worth looking at. There may also be an instance where debt stacking is better than a debt snowball. A lot of that determination will be based on your balances and your interest rates.


How a debt snowball works

The debt snowball method works similar to debt stacking but instead of targeting from highest interest rate to lowest interest rate, you target from highest debt to lowest debt. Bo methods are effective, but determining which is the best method for you depends a lot on the interest rates on your debts. Say, for instance, you have a debt in the mix that has a 21% interest rate. It can be very beneficial to get the debt with the 21% interest rate knocked out before any of the debts with much lower interest rates.
Using a debt snowball will save you a significant amount in interest that you would pay over the life of your loans if you were to only make minimum payments. Another element that determines the long term success of using a debt snowball is making sure not to add more debt. The only kind of debt you want to add after you're out of debt is auto loans and a home loan at most. Anything else such as furniture, vacations, or any other big ticket expenses, you are always better in the end by saving up cash for these expenses rather than using credit or a loan where you're going to pay even more for them when you add interest on top of these expenses.

How debt settlement works

For more drastic debt situations there is debt settlement. It is an intended for someone who can't afford to make minimum payments of their unsecured debts. It's the process of getting your creditors to agree to allowing you to pay a lesser amount than what you owe. For someone in a bad financial situation, it is not hard to qualify for a debt settlement program. This is because debt settlement is only for unsecured debts and since they are unsecured, the creditors don't have a lot of avenues on collecting that debt if you can't afford to pay. It's in their best interest to receive even half of the payback rather than none. This is also in the debtors best interest if they can't afford to keep up with their minimum payments. This is because if you can't even afford your minimum payments, you will pay what you can every month just to watch your balances stay pretty much the same, or even go up. It also makes it much more likely that your creditors won't take legal action such as file for a judgement against you if you are trying to reach a settlement with them.

Determining which is right for you

Like determining whether debt stacking or debt settlement is right for you, determining whether using a debt snowball or applying for debt settlement is a pretty easy determination to come to. Also, just like it may make sense to use a combination of debt stacking and debt settlement, the same can apply for using a combination of debt snowballing and debt settlement. Once you sit down and write out as accurate of an assessment of your debt to income ratio and interest rate for each debt this will make determining which method or combination af methods is right for you.

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Not all debts are eligible for enrollment due to our underwriting guidelines. Clients who make all their monthly program payments pay approximately 38% of their enrolled debt balance before fees or 67% to 71% including fees, over a term of 1 to 59 months. Our service fee is approximately 18% to 21% of the enrolled debt amount enrolled and approximately 25% to 31% of the amount our clients pay back. Not all clients complete our debt relief program for various reasons, including their ability to save sufficient funds while in our program. Estimates based on prior results, which will vary based on specific circumstances.
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We do not guarantee that your debts will be lowered by a specific amount or percentage or that you will be debt-free within a specific period of time. We do not assume consumer debt, make monthly payments to creditors or provide tax, bankruptcy, accounting or legal advice or credit repair services. Not available in all states. Please contact a tax professional to discuss tax consequences of debt settlement. Please read and understand all program materials prior to enrollment, including potential adverse impact on credit rating.