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Debt Consolidation vs. The Debt Settlement Option: What is Better?

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Debt Consolidation and. the Debt Settlement Method: Which one is better?

The debt consolidation and the debt settlement both have pros and cons. Which is best for you is based on your circumstances.

Written by Sean Pyles Senior Writer | Personal finance and debt Sean Pyles leads podcasting at NerdWallet as the host and producer of NerdWallet's "Smart Money" podcast. In "Smart Money," Sean talks with Nerds from the NerdWallet Content team to answer the questions of listeners about their personal finances. With a focus on thoughtful and practical advice on money, Sean provides real-world guidance that can help consumers better the financial situation of their lives. In addition to answering listeners' financial questions on "Smart Money," Sean also interviews guests who are not part of NerdWallet and also creates special segments that explore subjects such as the racial wealth gap and how to begin investing and the history for student loans.

Before Sean was the host of podcasts at NerdWallet, he covered topics related to consumer debt. His writing has been featured throughout the media including USA Today, The New York Times and elsewhere. When Sean isn't writing about personal finance, Sean can be found working in his garden, going for runs and taking his dog on long walks. He lives within Ocean Shores, Washington.

Updated Aug 5, 2021, 12:55 PM PDT

Edited by Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, financial management and debt Kathy Hinson leads the Core Personal Finance team at NerdWallet. In the past, she worked for 18 years with The Oregonian in Portland in roles including copy desk chief and team leader for design and editing. Her previous experience includes news and copy editing for various Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in mass communication and journalism in the University of Iowa.

The majority or all of the products featured here are from our partners, who pay us. This influences which products we write about as well as the place and way the product is displayed on the page. But this doesn't affect our assessments. Our views are our own. Here's a list and .

You're trying to pay off . Should you use debt consolidation as well as debt settlement?

They sound similar, but they mean two completely different thingsand each can lead to more issues for you.

It's debt-crushing time

Sign up to link and keep track of everything from credit mortgages to credit cards from mortgages to credit cards all in one place.

Debt consolidation

In this case, several debts are rolled into a single debt. You can make use of a balance transfer credit card, home equity loan as well as a 401(k) loan.

Why you might choose this option:

to get lower interest rates that you're currently paying which will save you money and helps you get rid of your debt faster

To reduce the amount of payments you're making

If the debt you're trying reduce is a manageable amount and type

• How to pay off your debt:

Debt settlement

It is risky as you defer payments from a creditor and, after your account is in serious delinquency, try to negotiate a lower amount of payment to settle the delinquent debt.

Withholding payments can ruin your credit scores and opens you to being sued over payment. There's no guarantee that the lender will agree to settle.

You can try or hire a company, but beware this field is filled with scammers. A Federal Trade Commission recently ordered 11 such companies to halt their marketing, saying they stole tens or thousands of dollars in cash from consumers , and provided them little benefit.

Why you might choose it:

Do this only if have an account that is long-delinquent, or in the process of being an insolvency situation, and you believe that the creditor may take a partial installment. You have little to lose because the damage to is already taken care of.

About the author: Sean Pyles is the director of production and host for NerdWallet's Smart Money podcast. His work has been published on The New York Times, USA Today and elsewhere.

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The Debt Settlement Process: What is It works and the risks you face

Advertiser disclosure You're our first priority. Every time. We believe that every person should be able to make sound financial decisions without hesitation. While our website doesn't feature every company or financial product on the market, we're proud that the guidance we offer as well as the advice we offer and the tools we create are independent, objective simple, and cost-free. How do we earn money? Our partners pay us. This could influence the types of products we review and write about (and the way they appear on the site), but it does not affect our suggestions or recommendations which are based on thousands of hours of research. Our partners do not pay us to guarantee favorable review of their services or products. .

Credit Settlement: How It Works and Risks You Face

By Bev O'Shea personal finance writer | MSN Money, Credit.com, Atlanta Journal-Constitution, Orlando Sentinel Bev O'Shea is a former NerdWallet authority on consumer credit, scams and identity theft. She has a bachelor's degree of journalism at Auburn University and a master's in education from Georgia State University. Prior to joining NerdWallet, she worked for daily newspapers, MSN Money and Credit.com. Her work has appeared throughout the world in The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and elsewhere. Twitter: @BeverlyOShea.

Updated on Jun 24, 2022 at 10:58AM PDT

Editor: Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, debt and money management Kathy Hinson leads the Core Personal Finance team at NerdWallet. Prior to joining NerdWallet, she worked for 18 years at The Oregonian in Portland in capacities such as chief of the copy desk and team editor and designer. Prior experience includes copy and news editing for various Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor's in mass communications and journalism at The University of Iowa.

A majority of the items featured on this page are provided by our partners who compensate us. This affects the products we review and the location and manner in which the product is featured on a page. However, this does not influence our opinions. Our opinions are our own. Here is a list of and .

Table of Contents

Table of Contents

The term "debt settlement" means that a creditor has accepted less than the amount that you owe as full payment. Once it accepts that deal it is no longer able to pursue you for cash and you don't need to worry about the possibility of be sued for that specific obligation.

It sounds like a good deal, but debt settlement can be risky:

Debt settlement can destroy your credit.

The process of settling a dispute can take a long time to complete -- usually between two to four years.

It could be expensive.

Even if you are successful at debt settlement it could take years and you may realize that you owe tax on any forgiven debt. And , if you work with a debt settlement company and pay for fees, you'll have to pay. This is not a last resort.

Find your debt in a simple method

Join NerdWallet to view your financial breakdown and future payments all in one place.

How debt settlement works

Debt settlement can be used only if you have a lot of missed or late payments, and perhaps collections accounts. A creditor or collector will not agree to pay lesser than what you owe if there's reason to believe you could that you originally agreed to.

Your will have been shredded, you will feel lost and your earnings will not be enough to pay all your obligations to creditors.

The companies that offer debt settlement work with creditors to cut down the amount of debt you have to pay, mainly on debt that is not secured like credit cards. It's not an option for certain kinds of debts, such as a house which can be foreclosed or a car that can be taken back. Most companies don't deal with federal student loans, but you might be eligible to . If you're struggling with your student loans, an might help you.

Settlement offers work only if it seems you won't make any payments, and you stop making payments on your debts. Instead, you establish an account for savings and make an amount per month there. When the company that settles your account believes the savings account is sufficient to warrant a lump-sum payment and will negotiate on your behalf with the creditor to accept an amount that is less.

Readers can also ask questions.

Do debt consolidation loans hurt your credit?

Debt consolidation can help your credit score if to make timely payments or shrinks account balances, especially if the balances on your credit cards were close to their limits. Your credit if you run up credit card balances again and close all or the majority of your other cards or make a late payment on your loan for debt consolidation. loan.

What can I do to reduce my credit card credit card

Debt settlement and bankruptcy can decrease or eliminate credit card debt, however, they have a significant impact on your credit score. The management of debt reduces interest ratesand the impact on credit is less severe. can reduce the interest rate as well.

How can I cut down my debt?

Reduce your debt by three steps. Find out what you owe. 2. Assess which payoff strategy will work for you. 3. Set a goal and track your progress.

Risks of debt settlement

Some debt settlement companies say they can reduce the amount of debt you owe by 50 percent, and get you debt-free within 36 months.

However, the procedure is not as clear-cut or as easy as it sounds. We believe that debt settlement should be a last resort.

Here are the risks that come with the settlement of debt:

Your credit score will be affected If you're not in debt and you're not, you'll be after you divert debt payments toward an account for settlement. Debts that are owed and owing off by lenders remain on your credit for a period of seven years.

Interest and penalties continue to accrue: You'll likely be slapped with late charges and penalty fees as well. Interest will continue to accrue in your credit card balance.

There's no assurance of success The two biggest debt settlement companies are and . Freedom Debt, for instance claims it has resolved greater than 10 billion dollars in debts for more than 650,000 clients since 2002. But there's no guarantee that the company can settle your debt substantially less, as some creditors are not negotiating with them.

According to a study by the Center for Responsible Lending, an independent research and policy institute, most consumers would have to settle at minimum four accounts in order to get a net gain. In addition, debt totals may rise as fees accrue, and aggressive collection attempts could continue throughout negotiations.

You must pay the cost for each debt that is settled: By law, these companies can't charge you upfront fees. Most of them charge a percentage of each amount they pay, depending on that amount of debt at the time you joined it in the program. Some charge an amount of the debt eliminated by the settlement.

For example, say you owe $10,000, and the agency negotiates a deal for $6,000. The agency will charge 25 percent.

If the agency is charged a percentage of the settled debt, you'd pay the creditor its $6,000 while paying the agency $2,500 in fees (25 percent of the $10,000 balance enrolled). Total: $8,500.

If the agency is charged a percentage of the eliminated debt, you'd pay the lender $6,000 and the agency would charge you $1,000 for fees (25 percent of the $4,000 in eliminated debt). Total: $7,000.

There are additional charges to pay in addition to the charges paid to when a debt settles the customer may also be subject to other costs, including the setup fee and the monthly cost to keep the account created under the program.

If you have forgiven your debt, it could be tax deductible Also, you should be aware that the Internal Revenue Service generally regards forgiven debt as income. You may want to consult an expert in taxation regarding any other tax obligations you'll be taking on if you settle your debt.

If you do decide to engage the services of an expert in debt settlement Be cautious. It's easy to fall into a state of panic when you're desperate and you see promises made by . The National Consumer Law Center has declared that debt settlement companies are "almost never worth it and could cause consumers to be in deeper financial troubles."

The Consumer Financial Protection Bureau takes a somewhat softer view, however, it warns consumers to be cautious in advising that dealing with these firms is risky , and other alternatives should be considered first. Over 300 complaints about debt settlement companies to the CFPB from 2014. Most of the complaints were fraud and excessive fees.

Other options to settle debt

Michael Bovee, a debt settlement coach who is often a critic of his business (he has presented evidence to the Federal Trade Commission in favor of greater regulation), advises erasing your debts with Chapter 7 bankruptcy and starting from scratch, if you've got the option.

For those who are burdened by debt that is not secured, like credit cards, consider how your options compare to . A bankruptcy is generally the better choice. Yes, a bankruptcy will sully your credit history for many years however the process of rebuilding is able to begin right away. Consultations with a bankruptcy attorney are usually free, but you'll be charged filing and legal costs if you opt for this route.

"If you can erase your debts in bankruptcy, such as a Chapter 7 bankruptcy, that's an excellent alternative to trying to reach the settlement," says NerdWallet columnist Liz Weston, author of "Your Credit Score" and "Deal with Your Debt." "Only if Chapter 7 isn't an option -- you refuse to file for bankruptcy, or if you only be eligible for a Chapter 13 repayment plan -in the event that you are considering the option of debt settlement."

If you aren't eligible for bankruptcy, or do not want to make one happen, you might consider a offered through a nonprofit . This option won't generally reduce the amount that you have to pay however it could decrease your monthly payment by spreading them out, or by reducing your interest rate. It will have less impact on your credit than either bankruptcy or a debt settlement.

If you choose to go for settlement

If you feel that you're in the right or most appropriate choice for you, and you'd like assistance with the debt resolution option, Bovee has tips for choosing a company wisely:

Check with the to see if there's a record of complaints.

Stay away from any company which offers cash in advance or promises your debt will be paid.

It is important to structure fees as a percentage of debt eliminated rather than of debt balance at enrollment; that will give the company a reason to reduce your debt.

Do not trust companies that claim that they will help you contest the validity of your debts and declare them "invalid" (a method that could backfire, resulting in more aggressive enforcement at your expense).

If you're not planning to engage a debt-settlement firm think about hiring an attorney or making it your own.

A lawyer can charge by the hour, have a flat fee per creditor, or be charged an amount of debt, or debts that are eliminated.

If you're seriously behind, it usually doesn't hurt to reach out to your creditors. Some banks have hardship programs that may be able to help. Be sure to manage any lower payment options the bank might offer.

If you want to try , educate yourself on what's likely to happen.

You may want to gather as much cash as you can to make a lump-sum offer, whether that's taking a part-time job, selling sports equipment that's been sitting in the basement, or taking money out of your cousin. (Creditors might be more likely to accept a lump sum offer that allows them to receive money quickly, instead of taking a chance on the possibility of not receiving payments.) Be aware that certain creditors may have a rule against settlement of debts.

Author bio Bev O'Shea was a credit reporter at NerdWallet. Her work has appeared in the New York Times, Washington Post, MarketWatch and elsewhere.

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Do You Really Need Identity Theft Protection Services?

Advertiser disclosure You're our first priority. Every time. We believe everyone should be able to make sound financial decisions with confidence. Although our site does not include every company or financial product that is available in the marketplace, we're proud that the guidance we offer and the information we offer and the tools we create are independent, objective, straightforward -- and free. So how do we make money? Our partners pay us. This can influence the products we review and write about (and where those products appear on the site), but it doesn't affect our suggestions or recommendations, which are grounded in hundreds of hours of research. Our partners cannot promise us favorable review of their services or products. .

Do You Need Identity Theft Protection Services?

Pay for a service only when you're in danger, refuse to block your credit, or don't want to monitor your own personal information.

by Sean Pyles Senior Writer | Personal finances and debt Sean Pyles leads podcasting at NerdWallet as the producer and host of NerdWallet's "Smart Money" podcast. In "Smart Money," Sean talks with Nerds from the NerdWallet Content team to answer listeners' questions about personal finance. With a focus on thoughtful and actionable money advice, Sean provides real-world guidance that will help consumers improve in their finances. In addition to answering listeners' financial questions on "Smart Money" Sean also interviews guests who are not part of NerdWallet and also creates special segments that explore subjects such as the racial gap in wealth as well as how to get started investing, and the history of student loans.

Before Sean was the host of podcasts at NerdWallet He also covered issues concerning consumer debt. His writing has been featured throughout the media including USA Today, The New York Times as well as other publications. When he's not writing about personal finance, Sean can be found digging around his garden, taking runs , and taking his dog for long walks. He is based in Ocean Shores, Washington.

and Bev O'Shea personal finance writer | MSN Money, Credit.com, Atlanta Journal-Constitution, Orlando Sentinel Bev O'Shea is a former NerdWallet authority on consumer credit, scams and identity theft. She holds a bachelor's level degree in journalism from Auburn University and a master's in education from Georgia State University. Before joining NerdWallet, she worked for newspaper publishers, including daily ones, MSN Money and Credit.com. Her work was featured throughout the world in The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and other publications. Twitter: @BeverlyOShea.

Updated January 25 2022

Editor: Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, debt and money management Kathy Hinson leads the Core Personal Finance team at NerdWallet. In the past, she worked for 18 years working at The Oregonian in Portland in positions such as copy desk chief and team leader for design and editing. Her previous experience includes copy and news editing for various Southern California newspapers, including the Los Angeles Times. She received a bachelor's degree in mass communications and journalism from The University of Iowa.

Many or all of the products we feature are provided by our partners, who pay us. This influences which products we write about as well as the place and way the product is featured on a page. But, it doesn't affect our assessments. Our views are our own. Here is a list of and .

Companies that offer identity theft protection promise to act as guardians of your personal information for either a monthly or annual cost. They typically begin with then layer on additional services to inform you of any potential problems.

However, alerts only flag you once the event has occurred; they aren't able to stop the theft and misuse of your financial information. That's the reason NerdWallet recommends taking action as it could stop the opening of fraudulent accounts.

You should consider purchasing an identity theft protection service only If:

You're already a victim or at high chance of becoming a victim.

You're not ready to freeze your credit reports.

You are sure that you will not undertake the task of actively monitoring your own credit.

You've checked and do not have adequate identity theft monitoring or in the event of an information breach.

You can do it by yourself

You can provide the most basic services provided by these firms by yourself, usually at no charge:

You can monitor your via a variety of personal finance websites like NerdWallet as well as a handful of charge card companies.

You are able to follow the no-cost recovery pathways outlined by the federal government at .

You can freeze your credit file at the 3 major credit bureaus -as well as -- at no cost this is something that an identity theft protection company will not be able to do for you.

"The first thing that consumers have to do when they're worried about ID theft is to freeze their credit reports," says Chi Chi Wu the staff attorney of the National Consumer Law Center. "Freeze, freeze, freeze. Everything else is gravy to top it off."

>> MORE:

What identity theft protection companies do?

In general, identity theft protection companies provide three major services:

Monitoring: Identity theft protection firms monitor your credit files and inform you of activity, such as new accounts opened under your name or credit inquiries received and you can respond quickly.

Alerts: Inform you of instances where your personal information has been used, such as when someone attempts to establish an bank account in your name. This is useful because many people aren't aware that the theft of their identity until their credit is damaged, their bank accounts depleted or they are suddenly a lot of debt that's been incurred in their name.

Recover: In the event that someone hacks your data and then misuses it, these companies can help you recover the money lost and repair the damage to your credit. They typically offer insurance policies that cover up to $1 million.

Many also offer tangential services for example, alerts on identity theft news and local sex offender registrations. Some monitor dark web sites which are known to be a source of stolen financial and personal information that you cannot do on your own.

Find identity theft protection solutions that are comparable.

It could be that you decide to purchase a full suite of safeguards and don't mind paying for peace of mind. Or you may know you can't do it all yourself.

If you are, then compare prices and details on coverage to determine which plan is suitable for you. Check that the product you choose monitors credit data at the three credit bureaus. otherwise, you're paying for incomplete security.

Beware of credit monitoring services that are more likely to offer less comprehensive coverage and may limit your right to sue them, even if they were the ones that exposed your financial information.

Here's a look at a few most popular products within the industry of identity protection. This is only a small sample but you could find a different provider that suits you better. If you've already put in credits freezes you'll have remove them temporarily to let a service access your personal files to monitor.

1. NORTON 360 with LIFELOCK ULTIMATE PLUS

Pros:

The most expensive Norton LifeLock plan, , offers multiple services to assist you in identifying and recovering from identity theft.

It comes with a password manager, as well as web privacy, and device security features.

The company adds value to the package by offering additional options including an identity theft plan, as well as legal assistance.

Cons:

The highest-end plan is expensive particularly when it covers the entire family. The coverage for two adults and up to five kids runs $48.99 each month for the first year and then renews automatically at a higher cost.

In 2015, LifeLock paid $100 million to pay an Federal Trade Commission charge that it had violated terms of a Federal court order regarding the security of consumers' personal information and avoiding deceptive advertising.

Cost: The cost is $29.99 each month for one adult the first year, and then it renews automatically for $34.99 per month. Discounts are available for paying annually.

Ideal for: People who don't have a large family to safeguard; who can afford to spend an extra amount for more comprehensive protection. Check out our complete .

2. IDSHIELD

Pros:

It is simple to comprehend exactly what you're receiving, as there are no tiers and the pricing is transparent.

Provides unlimited consultations with an identity theft expert.

Scans social media for reputational risk.

Cons:

As with all services, you may be tempted to dismiss the importance of using good cybersecurity practices.

Multiple alerts may lead you to abandon them without reading, missing crucial information.

Cost: Monitoring at all three bureaus of credit costs $17.95 each month, for individuals and $32.95 for families (two adults and up to 10 minor children).

The best option for price-sensitive clients who want to have their social media accounts scanned in a set. Check out our complete .

3. IDENTITYFORCE ULTRASECURE+CREDIT

Pros:

IdentityForce provides less expensive three-bureau monitoring than the big names like LifeLock.

It is possible to purchase an entire family plan, which covers two adults and any children aged 25 or under.

Provides information about the possibility of Health insurance scams.

Cons:

The sign-up process is tedious, requiring you to input information repeatedly.

This family policy isn't readily apparent on the website and you'll need to contact us to inquire about it.

Pinning down the lowest price can be tricky, since prices differ based on whether you sign-up online or over the phone.

Cost: $23.99 a month or $239.90 a year for the plan that provides monitoring of all 3 major credit bureaus. As noted, though, discounts are usually available. It's wise to seek it.

Best for: Those who require insurance on a budget. people who require medical identity coverage.

4. ID WATCHDOG PLATINUM

Pros:

ID Watchdog keeps credit monitoring easy with alerts, recovery and monitoring.

A standout feature is that it can help you recover from pre-existing identity theft at an additional cost of $79.95 to $279.95, depending on the type of fraudulent credit line.

Cons:

Equifax purchased ID Watchdog in 2017, in the same year Equifax had a significant data breach that exposed sensitive personal data of more than 148 million consumers.

The company's mobile application and desktop user interface offer less information than those of its competitors.

ID Watchdog offers fewer monitoring services than other businesses.

The cost: $19.95 a month or $219 for an annual plan with three bureaus of credit monitoring.

The best option is for those who need help to recover from identity theft that was pre-existing.

Are you in need of a credit review?

Register for an account to have your credit report free and score available all the time.

The authors' bios: Sean Pyles is the executive producer and host of NerdWallet's Smart Money podcast. His writing has appeared throughout the pages of The New York Times, USA Today and elsewhere.

Bev O'Shea was a former credit writer for NerdWallet. Her work was published on the New York Times, Washington Post, MarketWatch and elsewhere.

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6 min read The publication was published on October 06, 2022.

Authored by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers to navigate the details of taking out loans to purchase a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are committed to helping readers gain the confidence to take control of their finances with clear, well-researched information that breaks down otherwise complex topics into manageable bites. The Bankrate guarantee

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So, this compensation can influence the manner, place and in what order products are listed and categories, unless it is prohibited by law. We also offer mortgage, home equity and other home lending products. Other factors, like our own website rules and whether the product is available in the area you reside in or is within your own personal credit score could also affect how and where products appear on this website. We strive to offer a wide range offers, Bankrate does not include specific information on every credit or financial product or service. The truth is that dealers don't want to scam you. But as an informed consumer it is important to be ready for situations in which you encounter a salesperson with a bag of tricks aiming to maximize profits. Car dealer tricks to watch for. These are some tricks dealerships -- even the most legit -- may try to run on you when it comes time to buy. 1. The credit broker might inform you that you do not qualify for the best rates. While this could be the case in certain instances but the salesperson might suggest your credit score is lower than it is, so you believe you'll need to pay a higher interest rate. How to avoid: Come in with your on hand before you sit down with the salesperson so they don't try to trick you. Better yet, for an auto loan to ensure that you don't need to rely on dealership financing. 2. The single-transaction strategy Many people view purchasing a vehicle as a single transaction. The reality is that it's not. Dealers recognize this. It's really three transactions all in three: the new car price, the value and financing. Each of them is a way for the dealer to make profits, which means that all three are ways you could save. How to avoid treating every transaction in the same way the dealer does: separately. You can look around at different dealers to get the best price. And coming in with common sale prices for the vehicle you're considering will ensure that the salesperson is up-to-date. 3. The payment ploy The sales or finance team could throw an amazing monthly payment -- one that you reasonably could qualify for. However, there's usually a catch. In some cases the dealer might have included a substantial down payment, or extended the terms of the auto loan up to 72 months or . Avoid this by focusing on the value of the car rather than the monthly payment. Don't answer the question "How much do you need to pay each month?" Stick to saying, "I can afford to pay X dollars for the car." It is also important to be sure that the price you negotiate is in full before your trade-in or is used. 4. The sticker shenanigan . The car price listed on the window is is known as the manufacturer's suggested retail price or MSRP. However, that's not what's most important. You need to know the value of the invoice -- the amount that the dealer was paid. Starting with the invoice is much simpler than trying to cut off the MSRP. How to avoid: What is the value of cars after taking into account any consumer or incentives offered by dealers. Certain hot cars are sold for sticker price and above. The prices will fall as the demand declines. 5. The holdback hustle Manufacturers often give cash incentives -- sometimes called holdbacks -- to dealers to motivate them to sell slow-selling models. This typically isn't mentioned in advertising. Tips to avoid it search for holdbacks and other factory-to-dealer incentive options for the vehicle you're considering. Although it's not guaranteed that the dealer will apply the funds for the car you're interested in, it doesn't hurt to inquire. 6. Spot delivery financing Some Dealers have reported to contact customers for days up to weeks or months following the time they signed a purchase agreement to tell them that the financing fell through. It's a scam. Spot delivery, also referred to as spot financing, is a scheme to induce you to sign an loan contract with a higher rate of interest. The dealer can know whether you're eligible for financing almost instantly. The goal of the later call is to get you to accept an loan that has higher interest rates due to the fact that, according to them they've just discovered you weren't eligible for the lower rate they quoted. How to avoid: Never walk out the door without signed contracts that spell out each and every line left in. Verify that you've been granted the financing your dealer offers. If that's the case you are approved, they cannot withdraw the loan. 7. The illusion of insurance A few dealers might attempt to convince you to buy an insurance policy when you're purchasing your vehicle. One kind of insurance, called gap insurance , covers the difference between what the vehicle is worth and the amount you still owe on it. It's usually just an extra expense, but if you would like it the gap insurance will generally be cheaper when bought from your usual . Another favorite, credit life insurance, can pay off the portion of your loan in the event of your death before you've had the chance to pay it back. If these policies interest you, you will want to know what you're purchasing, and that you can opt out and shop for cheaper rates. The cost of these policies when you purchase them from a dealership could be huge due to the fact that the insurance companies who sell the policies to dealers offer them huge incentives including everything from cash to first-class trips in order to promote the policies. What to do Avoid a bind: Do not simply accept the insurance policy offered. Certain insurance companies include the benefits of gap insurance as part of their standard comprehensive auto insurance, so check there first. For credit life insurance, you'll more than likely want to steer clear of it. In most cases it's not a good idea for you. 8. The rate razzle-dazzle It certainly sounds tempting -- to finance a brand new car. However, this deal may not be the best one for your budget. First of all, the majority of financing incentives are for shorter terms, and you require a high credit score. For short-term loans, such as 24 - or 36-month loans and even on the cheapest car can be extremely high. Additionally, you might be better off finding your own financing and then using the dealer rebate when one is available. If you're considering an automobile worth $20,000 and get $4,000 for your trade-in. You have the option of choosing 0 percent financing or financing at 3.49 percent and the option of a rebate of $2,000. The term that you can avail of this loan runs for 36 months. Through the loan you'll be ahead by more than $1,200 when you use the rebate along with 3.49 percent financing. 3.49 per cent financing. Tips to avoid it using an application to calculate the exact amount over the course of the loan to determine what offer is best for you. 9. The rollover scam It could be tempting to sell your car to a car that is more expensive before you have finished paying off the vehicle you're driving. One method by which some buyers do this is to roll over the remaining balance on their current car to a new car loan or lease. This is an extremely risky decision. You will end up owing more for the second vehicle than what it's worth. In the jargon of the auto industry it's a " " in the car. If it is totaled in an accident, or you decide later to trade it in, you will end up writing out a large check to pay the remaining portion of the loan. Avoid this you from having to roll over an old car loan into a new one. Instead, you should try to negotiate a good price for it either through a trade-in, or a private sale. If you aren't able to, stick with the car. If you don't absolutely need a new vehicle There's no reason to buy a new car after you've completed the payment on your previous car. 10. The long-term scam The long-term trick isn't illegal or deceitful regarding dealers offering loan durations that last for up to seven or six years. After all, many cars are more durable than they did in the past which means that your monthly payment is lower. But it's not the best option. You're likely to owe more on your vehicle than it's worth since your vehicle is depreciating faster than you're paying it off. Tips to avoid this: If you are considering an extended loan duration, you should scale back to the cheapest vehicle that's more for your budget. 11. The balloon scam is similar to the one that occurs when some dealers will encourage buyers to buy a car for unrealistically low monthly payments at the moment, only to have a more substantial balloon payment towards the time of the loan period. In certain instances it can be a legitimate method to finance a car. For instance, you could have just graduated and can realistically assume that your income will rise when the balloon payment due. However, for the majority of people, a balloon payment just involves rolling over the amount into the form of a new loan. What to do Beware of these deals and remember the fact that your situation might change by the time the balloon payment due and you could be unable to make it. 12. Bait and switch Bait and switch happens when you're in the market for one car and the dealer is able to get you behind the steering wheel of another one. Dealers may use deceptive strategies to convince you to go to the lot, only to tell you that the car you'd like isn't available and then try to sell you on another vehicle, usually at a higher price. What to do: Stick to what you want. If you've done your research and are aware of what you are looking for, then there's no reason to doubt yourself. Try an alternative dealer who has the car you want. 13. Contract cons Watch out for clauses that are hidden within the fine print that you could otherwise miss. They might come in the form of modifications to the loan period, additional terms that you never agreed to or other services that can lead to significant cost. A legit lender will not attempt to scam you with this kind of thing however it is important to be vigilant. If you find any irregularities, point them out. If the dealer isn't willing to make the necessary changes then walk away. How to avoid: Read carefully through the contract. Be sure to inquire about all fees and make sure the terms are clearly understood by both you and the dealer. Be sure to keep the contract in a safe place to be prepared in the event of any issues later down the line. The goal is not to be an experience where you are manipulated and walk away feeling like you paid too much for your car. Knowledge is power, so take note of these typical dealer tricks to ensure you aren't getting scammed. Learn more

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The article was written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers with the details of borrowing money to buy a car. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances with clear, well-researched details that cut otherwise complex subjects into bite-sized pieces.

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Related Articles Auto 7 min read Jan 17 2023. Loans 5 min read Jan 12 2023. Loans 5 minutes read October 10, 2022. Loans Read 7 minutes Aug 23, 2022

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About the author: Lauren Schwahn covers consumer credit and loans at NerdWallet. The work she has written for NerdWallet was highlighted on USA Today and The Associated Press.

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How the car buying process has changed in 2023 Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make smarter financial decisions by offering you interactive tools and financial calculators, publishing original and objective content. We also allow users to conduct research and compare data for free to help you make sound financial decisions. Bankrate has agreements with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn money The products that appear on this website are provided by companies that compensate us. This compensation may impact how and when products are featured on the site, such as for instance, the order in which they may be displayed within the listing categories, except where prohibited by law. This applies to our loan products, such as mortgages and home equity and other home lending products. This compensation, however, does have no impact on the content we publish or the reviews that appear on this website. We do not cover the vast array of companies or financial deals that may be available to you.

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5 minutes read. Read on January 26, 2023.

Authored by Rebecca Betterton Written by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers to navigate the details of using loans to buy a car.

Editor: Helen Wilbers Edited by

Helen Wilbers has been editing for Bankrate since late 2022. He believes in clear reporting that helps readers confidently land deals and make the best choices for their finances. He is a specialist in small business and auto loans.

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Cars are the second most expensive purchase that people make during their lives. The process of securing this expensive item was historically a painful experience filled with and on the dealer lot. However, with the change in normal that the pandemic has brought, many dealerships are now embracing this and making it easier to purchase experience. Car buying in 2023 is a hazard supply chain problems that keep costs up. As consumers, it's crucial to utilize the changing purchasing process of cars for your benefit. Think about the following ways the car buying process could be different in the next year to both the driver as well as the vendor. What should you expect when purchasing a car this year As we move deeper into 2023, it is difficult to stay clear of news of a looming recession. Economic experts believe that the economy has a 64 percent likelihood of entering a recession in the coming year, according to. While the probability of a recession is not directly related to a customer's experience on the lot, expensive prices at the dealer could cause more discomfort when you purchase the next car. The month of December saw another record-breaking purchase price for new vehicles, $49,507, according to . However, the future isn't all doom and gloom, as dealers have been aware of the challenging macro-environmental developments. Bankrate spoke with Dave Thomas, director of content marketing and an automotive market analyst for CDK Global, for insight on the upcoming trends for this year. Price is still the most important factor when you're in the market for a new car this year, youas the majority of buyers, according to the -- could be using price as the primary focus. Although the commitment to time to purchase a car is a consideration for the remaining half of surveyed consumers and buyers, price is the primary consideration. This year is likely to be a more tumultuous roller coaster for drivers, says Thomas. "For buyers, the main focus will be about those interest rates and the best way to locate the one that is within your budget" Thomas explains. This "could create somewhat more challenging than it was before the lower inventory." If you are shopping, make sure to consider you should consider a variety of financing options to make sure that you get the most favorable deal, even when you pay higher prices and higher interest rates. Bankrate tip

If you are considering a purchase, think about the total of what you'll need to pay -- more than just your monthly costs.

In the event that people head to a dealer, they have some idea about the kind of car they'd like to buy. However, there are many drivers who have found showrooms empty of their dream vehicles. In the CDK's six-month period , "the number of shoppers finding the vehicle they are looking for available has not exceeded 50 percent," says Thomas. Even more inventory is decreasing compared to 2019. Although conditions are improving, the supply is still below demand, according to J.D. Power. The lack of inventory has also caused an increase in customers who do not visit the dealership at all. "Some brands are seeing inventory returning, but most are different in the number of cars are in stock," Thomas says. This "led to the increase in customers buying cars from the factory with the process being handled at the dealer." The options to purchase online will increase. The traditional car purchasing experience hasn't seen a major makeover in many years and people are used to the long-winded process of buying a new or used vehicle from a dealership. This shift into online car buying is not a completely new idea. A lot of local dealers have had online marketplaces available for buyers to peruse options prior to visiting the lot. But the online car shopping experience has become more thorough in recent times. The time away that many motorists took from the car buying process because of the high cost can also mean that they require additional guidance when shopping. So while online shopping is on the rise, Thomas explains that "76 percent of those we surveyed indicated that they were willing to spend time trying to understand all of their options" which is up from 70 percent in 2021 according to the 2023 . If you're among those who remained on the sidelines during the last year due to steep prices be assured of the flexibility of this market. Dealerships will remain in operation. traditional dealerships aren't likely to be obsolete in the near future, it has seen shifts since the pandemic. A lot of drivers are taking advantage of online ordering like or the time local dealers are unable to fill their showrooms. Yet, 91 percent of shoppers did not go through the traditional process to purchase a car over the last year, according to the CDK survey. It is also interesting to note that nine percent of motorists who did complete the car purchase process completely online did not score the satisfaction very high. This is why it is wise not to ignore the personal experience that offers. However, many dealerships offer customers the most beneficial of worlds approach by allowing customers to start online and finish at the location. Thomas explained the switch. Many of the automakers that have been around for decades are "streamlining the process online and attempting to make the switch from doing a portion of the journey online into an effortless experience in the car." Drivers benefit from the capability to crunch the numbers at the convenience of home , but still enjoy the driving experience before signing the documents. 4 ways to use the internet to your advantage. Online car shopping is new, and it requires a bit of learning. While some tips are in line with the traditional approach to car purchasing, consider these suggestions when you're not on the showroom. 1. If you are able to research in person, or not finding out the most relevant information is the first step in the car-buying process. Think about what aspects are most important to you including the dimensions of the car as well as the fuel efficiency or the style and color. While you might not be able explore the new car in person, YouTube car tours are a great resource to see the specifics a vehicle can offer. 2. Create a budget after you have set your sights on the type of vehicle that you want, it is essential to know what you're willing spend and . This will require some additional work but is much easier without a salesperson pressuring you. Enjoy your stay at in your home and think about all the factors that affect you like your income, fuel, insurance and any additional costs for your vehicle. 3. Check local inventory Another benefit of shopping for your car on the internet is the ability to verify local inventory prior to visiting the store in person. This can be done in a few ways. Look at specific dealers in your area -- search, for example "Toyotas sold close to me" or look up websites such as Edmunds or TrueCar. This research will also help in understanding the price landscape for your dream car. 4. Chat online with salespeople . Negotiation can be one of the most daunting aspects of car buying, but when you're sitting behind a computer it's much easier to bargain for the price you're worthy of. Most of the online marketplaces you'll come across will offer chat. Make use of this feature to ask the appropriate questions. Make sure to be firm and share information you found when you look up local inventory for the various prices. The bottom line is that the car-buying experience has shifted for both the dealer and the consumer over the last few years due to a variety of factors: Global pandemic inflation, global pandemic problems, supply chain challenges and the advancement of technological. But it is important to remember that a refresh of the business is taking place which is bringing more transparency and accessibility for the driver. Therefore, even though it's likely that car dealerships will completely disappear, think about purchasing online and saving both money and time.

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Authored by Auto Loans Reporter

Rebecca Betterton is the auto loans reporter for Bankrate. She has a specialization in helping readers in navigating the ins and outs of securely using loans to buy an automobile.

Editor: Helen Wilbers Edited by

Helen Wilbers has been editing for Bankrate since the end of 2022. He values the clarity of his reporting, which helps readers easily get deals and make most appropriate choices regarding their finances. He specializes in small business and auto loans.

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Smart Money Moves for Black Americans in Financial Distress

Advertiser disclosure You're our first priority. Every time. We believe that every person should be able to make sound financial decisions with confidence. While our website doesn't feature every company or financial product that is available, we're proud that the advice we provide as well as the advice we provide and the tools we create are independent, objective easy to use and completely free. So how do we make money? Our partners compensate us. This could influence the types of products we write about (and where they are featured on our website), but it in no way affects our suggestions or recommendations, which are grounded in hundreds of hours of research. Our partners do not promise us favorable review of their services or products. .

Smart Money Moves for Black Americans in Financial Distress

By Sean Pyles Senior Writer | Personal financial and debt Sean Pyles leads podcasting at NerdWallet as the host and producer of NerdWallet's "Smart Money" podcast. In "Smart Money," Sean talks with Nerds across the NerdWallet Content team to answer the listeners' questions about personal finance. With a focus on shrewd and practical advice on money, Sean provides real-world guidance to help people improve in their finances. Beyond answering listeners' money concerns on "Smart Money" Sean also interviews guests who are not part of NerdWallet and also creates special segments on topics like the racial inequality gap, how to start investing, and the background of student loans.

Before Sean lead podcasting for NerdWallet the company, he also wrote about topics related to consumer debt. His writing has been featured throughout the media including USA Today, The New York Times and other publications. When he's not writing about personal finance, Sean can be found digging around his garden, taking runs and walking his dog for long walks. Sean is located at Ocean Shores, Washington.

Updated Feb 5, 2018

Written by Hanah Cho Vice President Personal financial Hanah Cho, Vice President for Content. She managed multiple NerdWallet teams that focused on personal finance before becoming deputy director and then director. She first joined NerdWallet as a journalist, covering small-scale businesses. In the past, she was a reporter covering startups and business at The Dallas Morning News, and previously was a journalist for business at The Baltimore Sun. She was also treasurer of the Texas Chapter of the Asian American Journalists Association.

Many or all of the items featured on this page are from our partners who pay us. This influences which products we feature and where and how the product is featured on the page. But, it doesn't influence our evaluations. Our views are our own. Here is a list of and .

Credit card debt that is at record levels and fluctuating incomes cause financial difficulties in the majority of American households, particularly those with lower incomes. These effects can be particularly acutely felt in black households which are a victim of systemic and historical discrimination against blacks has created greater disparities in wealth and debt.

However, there are steps that families facing such hardships can make to better their financial position, which includes improving their credit score and seeking alternatives to products that are risky such as .

Insidious disparities of wealth and debt

Disparity in wealth and debt can be a source of friction according to Pamela Chan, project director of human insights at Prosperity Now, a non-profit based within Washington, D.C.

"If you're a person who doesn't have lots of wealth ... then when emergencies hit, that often makes people rely on borrowing to help through the times," Chan says. "Then when someone is in debt, if they don't have money, they're more vulnerable to a disaster while trying to pay off their debt."

The discrimination imposed by institutions against black generations of Americans and its ramifying consequences have contributed to black households having greater financial difficulties than white families, Chan says.

A wage differential is a prime example. As of 2015, black men made 22% less than white men with, for example, the same educational, work experience, and residence region the report of the Economic Policy Institute found.

In 2016 the median family wealth for whites was nearly 10 times the median amount of wealth for black families -$171,000 as opposed to $17,600 according to the Federal Reserve's Survey of Consumer Finances.

How to improve finances to increase wealth

is the first step towards making money. Before you take action an accredited financial advisor from Michigan Weslia Echols recommends planning a long-term strategy.

"The first thing I ask clients to do is take deep breaths. When you do that, and assess the situation fully and honestly, you'll not be looking for an immediate answer, such as the typical payday loan," Echols says. "Getting out of debt is a lengthy process."

Echols recommends establishing a clear budget and payoff strategy. Here are some suggestions to enhance your financial picture.

Build credit Credit report and score is among the top important factors in your financial situation. If they're in good state, you'll become more appealing to lenders, which increases the chances of getting credit at lower rates. NerdWallet provides both a and credit score that is which is updated every week.

Check your credit card for any incorrect information, such as an account that's not yours which could affect your score.

You can then begin to increase your score by making on-time payments on all accounts, including the credit card and loans Paying history is the biggest single factor affecting it. Credit bureau Experian suggests keeping your credit limit -- or how much of your credit limit you use -- below 30%.

Be strategic about debt: In 2017, the Survey of Consumer Finances shows that families with black parents tend to carry debt-to-income ratios -- which is how much debt you have compared to your income -- higher than 40%, which is a sign of financial stress according to the Federal Reserve. Nine percent of families from black households were carrying DTIs over 40%, compared to 6percent for white households.

Take care of your debt as economically as possible to pay off your debt quicker by lowering the interest rate. Transferring the balance onto a zero-interest credit card could be an alternative for borrowers with good credit.

If you're not eligible for such a card consider whether it can help you pay down your credit card debt quicker and more affordably. If your monthly installments exceed 50% of your income You may need to seek legal advice on what is the best option for you. Although it won't eliminate all debts, it can offer an opportunity to start over and aid in meeting other financial goals, such as saving for retirement. Resources such as LawHelp.com will direct you to local legal aid.

Avoid products that are risky: Thirty-nine percent of black Americans are likely to use high-interest loans, like payday loans in comparison to 21 percent of white Americans as per an assessment from the Financial Industry Regulatory Authority. These loans can carry interest rates that exceed 300% and could lead to repeat borrowing, trapping the customer in a cycle debt.

If you need cash, you can get more favorable loan rates at the local credit union. Apps like Earnin provide you with the ability to advance your salary with no fees or interest. If you're in a bad credit situation, a -- also accessible at numerous credit unions will provide you with the money you require while you work to improve your credit score.

For more help, tap the free guidance of an organization that is not for profit, such as the National Foundation for Credit Counseling.

This piece was designed by NerdWallet and was originally released through The Associated Press.

About the author: Sean Pyles is the executive producer and host of NerdWallet's Smart Money podcast. His writing has appeared in The New York Times, USA Today and elsewhere.

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