Debt Consolidation vs. Debt Settlement

Posted on March 31, 2021 in Debt

What’s the difference between debt consolidation vs debt settlement?

If you owe debts, you have like heard the two terms debt settlement and debt consolidation. As you try to figure out which one is best for your situation, we wanted to put together this guide to make it easy for you to understand the differences between the two.

  • Debt consolidation and debt settlement both help reduce debt loads, but they do so differently. 
  • Debt settlement helps to cut the total debt owed. Debt consolidation helps to cut the total number of creditors owed.
  • Multiple loans are rolled into a new debt consolidation loan with one monthly interest rate with debt consolidation.
  • Either you or a credit counselor will negotiate with your creditors for you to be able to pay a lower amount than what you owe with debt settlement. This often comes in the form of a lump-sum payment.

Debt Consolidation: What is it?

Debt consolidation is a method used to combine multiple debts into a single consolidation loan. When comparing debt settlement vs. debt consolidation, this single loan rolls all of your prior debts into one monthly payment with one interest rate. Financial intuitions like banks, credit unions, and online lenders offer consolidation loans. You will pay the institution consolidating your debt going forward.

Consolidation can lead to a lower monthly payment or lower interest rate on your debt, and the loan can be unsecured or secured.

Secured debt consolidation loans require the borrower to use at least one asset as collateral, like their home, car, retirement account, or insurance policy. For example, if you take out a home equity loan, your home would secure the debt consolidation secured loan.

How to Consolidate Your Debt

Balance Transfer

A balance transfer moves debt from one account to another. You can do this by moving high-interest credit cards or loans to a new credit card with a low or 0% introductory APR. Some other benefits of balance transfers include no late fees, and you can choose your payment due date.

Personal Loan

A personal loan is another option for debt consolidation, which is a new loan taken out to pay off existing debt balances.

Whether you choose a P2P loan, unsecured loan, or secured loan, you want to make sure that your personal loan comes with a lower interest rate or smaller monthly payments to reduce the cost of borrowing or help make your payments easier to manage.

Home Loan

Using a home equity loan to consolidate your debts will typically result in lower monthly payments since you will likely have a lower interest rate and a longer loan term. 

Student Consolidation Loans

If you have numerous student loans, you might be able to merge them into one loan with a fixed interest rate. This rate will be based on the average of the interest rates on the loans you are consolidating. 

Do consolidation loans hurt your credit?

When you consolidate your debts, you are taking out a new loan, which will require a hard credit inquiry which will impact your credit score for the short term. But, long-term, when compared to debt settlement, debt consolidation loans may be better for your credit than balance transfers. But, you have to remember that any late payments will negatively impact your credit score. 

As you reduce your debt over time thanks to your debt consolidation loan, you will reduce your credit usage ratio, boosting your credit score. As long as you make your payments on time and only take on new debt you can afford, a debt consolidation loan will allow you to strengthen your credit.

Is it smart to consolidate debt?

If you find yourself drowning in debts that you simply can’t keep up with, debt consolidation may be able to help you take back control of your finances. Of course, you must ensure you are smart with your debt consolidation loan and don’t abuse the system. When determining if debt settlement vs. debt consolidation is better, you must continue by paying on time and not accruing more debt.

Debt Settlement: What is it?

Where debt consolidation lets you combine multiple debts into one loan, debt settlement uses a completely different strategy. When you settle debt, you are essentially asking one or more of your creditors to accept payment for less than what you owe. If you are able to reach an agreement with your creditor(s), then you can either pay the settlement in a lump sum or in a series of installments.

Credit Card Debt Settlement 

If you have maxed out your credit cards and find yourself sinking deeper and deeper into debt, you likely find yourself overwhelmed at the thought of never being able to pay back what you owe. You may stumble upon companies that say they are willing to reduce or even erase your debt for extremely cheap. Is this too good to be true? 

Debt settlement Risks & Benefits

Risk of debt settlement vs. debt consolidation include:

  • The programs often require debtors to deposit money into a special savings account for 36 months or more before all debt can be settled. Many people have a hard time making these payments long enough to get their debts settled, and they drop out of the programs.
  • Creditors are under no obligation to agree to negotiate a settlement for what you owe.
  • There are a number of debt settlement scams out there you must watch out for.

Benefits of debt settlement include:

  • Your debts are reduced, allowing you to pay less.
  • Debt settlement provides you with some psychological relief.
  • You can stop being chased and harassed by creditors.
  • You won’t be sued over settled debt.
  • Debt settlement can also allow you to pay off your debts much quicker.

Debt Settlement Options

One size fits all rarely applies to unsecured debts. The following debt settlement companies can help you strategize the best plan for your own needs and financial situation, and help you answer the question, “is debt settlement really worth it?“.

TurboDebt

TurboDebt is one of the few companies who can connect clients to a range of debt relief programs that fit their unique needs. The company offers strategic planning, advising, and consulting on debt relief options that can help you become debt free and work to save money again. Get in touch today to get help determining which is better: debt settlement vs. debt consolidation.

Accredited Debt Relief

Accredited Debt Relief helps people across the United States by creating personalized debt relief programs that work. The service they provide is a form of debt consolidation without a loan. The company’s customized plans aim to help debtors reduce what they owe, avoid filing for bankruptcy, and finally overcome overwhelming debt.

ClearOne Debt Relief

Getting out of debt often seems overwhelming and even downright impossible. But when you partner with a company like ClearOne, you don’t have to go at it alone, and instead, you gain an experienced team of professionals who are dedicated to your success. ClearOne has a team of highly skilled Certified Debt Specialists, Negotiators, and Client Relations Specialists who go through extensive training and bring years of experience to the table to ensure that they get their customers the biggest savings when settling debts.

What is Better: Debt Consolidation or Debt Settlement?

If you’re looking for the best way to manage your debts, you are likely weighing the pros and cons of debt consolidation and debt settlement. Depending on your specific situation, it’s likely that one is better than the other. You may also wish to compare debt consolidation vs bankruptcy, or debt settlement vs bankruptcy.

For example, for debtors simply in need of a way to make their monthly payments more manageable, debt consolidation into one single loan makes sense. Don’t forget that you will need good credit to qualify for the lowest rates on debt consolidation personal loans.

On the other hand, if you are already behind on payments for one or more debts and the creditors are threatening to sue you, debt settlement may be a better fit for your circumstances. Assuming you have the cash on hand to make settlement payments, debt settlement may be less financially damaging than filing for bankruptcy protection.

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