Interest Rate in Debt Settlement And Negotiation

One common question that consumers who are considering debt settlement ask is, “Do interest charges stop during the debt negotiation process?” This is a valid question and a concern of many consumers that some debt settlement companies fail to address during their consultations with consumers weighing their debt relief options.

In short, no, interest charges and late fees do not stop from accruing because you are enrolled in a debt settlement program. That being said, the savings from enrolling in a debt negotiation service are still significant, especially when considered in light of the other alternatives available---continuing with just making the minimum payment and credit counseling.

The debt relief is still significant for a couple reasons. First and perhaps most importantly, the interest charges from credit cards can be so high that consumers who are just able to afford the minimum payments cannot be debt free for up to 20 years. To better understand this concept, consider the following. Let’s assume that a client in debt settlement who owes $30,000 will pay roughly $550 per month for 33 months. Including the fees charged by the debt settlement company the consumer pays back roughly 61% of the total debt they owed. If the consumer were to pay $550 per month to their credit card minimum payments instead (which is a doubtful scenario because most credit card companies ask for at least 2% of the balance, or $600), assuming they are being charged interest at an annual rate of 19%, they would pay almost $70,000 over 10 years before they were finally debt free. Worse yet, if anything were to happen during those ten years that forced a consumer to miss a payment (reduction in income, sudden expense like car repairs or medical bills) the credit card companies would most likely jack the interest up to the dreaded default rate, which is oftentimes as high as 32 percent annually. Considering the fact that the debt is being paid back over 10 years, it is highly possible that an unforeseen circumstance would come up during that time period that could make missing a payment inevitable.

The second reason why the savings from debt settlement are still so dramatic, despite the interest and late fees accrued during the negotiation process, is that in some cases the finance charges will slow once the account has been charged off, which normally occurs once the debt has been delinquent for 6 to 8 months. This is not necessarily guaranteed to happen, but even in the worst case scenario (the interest charges continue to accrue throughout the negotiations), consumers pay far less than they would have paid otherwise by making minimum payments, which as we illustrated in the paragraph above can be as high as $70,000.