Debt consolidation vs debt settlement

debt consolidation vs debt settlement

Both debt consolidation and settlement are strategies for debt repayment. Debt consolidation involves combining several debts into a single loan or credit card. In contrast, debt settlement is where a debtor negotiates with their creditors to agree to accept a payment amount that is less than the total amount owed. 

Debt is a massive burden for many people, both financially and emotionally. The average American has $90,460 in debt.1 Credit card debt, student loans, medical bills—it all adds up fast. 

To solve this personal finance dilemma, many people turn to a debt management plan. A debt management plan is a program that helps individuals or families get out of debt with a strategy that goes beyond making regular monthly payments. 

A good debt management plan follows one of two pathways—debt consolidation vs. debt settlement. Each of these options will significantly reduce your debt, but their effectiveness can vary for several reasons.

This blog will show debt consolidation and debt settlement work and how they can work for you. If you’re ready to get out of debt, keep reading.

Types of Debt

Debt consolidation vs. debt settlement—anyone who is thinking about actively eliminating debt faces this argument. When considering what plan is best for you, deciding which accounts you want to manage will be essential. That decision may come down to the type of debt you have. Let’s take a look at the significant kinds of debt:

Secured Debt

Secured debt is backed by an asset that the borrower owns that is pledged to the lender. This asset is called collateral. If the borrower fails to repay the debt, the collateral is seized by the lender to recoup their loss. 

Unsecured Debt

With unsecured debt, you are borrowing money and not using any assets as collateral. The lack of collateral makes unsecured debt riskier for the lender than secured debt. When a lender doesn’t require the loan to be backed by any assets, they trust your reliability to repay the loan. 

The most common types of unsecured debt are personal loan options and student loans. If you don’t pay back the loan by the due date or in full, then your repayment may be increased with interest and fees. Additionally, any late or delinquent payments can hurt your credit score.

Revolving Debt

Unlike an installment loan that delivers a lump sum cash payment, revolving credit gives you a credit limit that you can use as you please. Your credit limit stays the same regardless of monthly repayments, and all you have to pay is back the funds you use. 

If you do not repay the total amount by your due date, the balance moves over—or revolves—into a new “loan.” The best example of revolving debt is a credit card. Revolving debt will continue to accrue interest every billing cycle if the debt is not repaid.


The largest form of debt that many people carry is a mortgage. Mortgages are loans that use real estate as collateral. Mortgages are among the safest investments because they have a low risk of default and usually carry lower interest rates than other investments. A typical mortgage has a loan term of 15 to 30 years. The length of the loan depends on whether you want a monthly payment to be comfortably affordable.

Depending on your financial situation, any one of these types of debts can become tough to manage. Poor spending habits, unexpected fees, and changes in income can all affect our ability to repay what we owe. Working with a debt consolidation firm or debt settlement company can bring some much-needed financial relief. 

Keep in mind if you do decide to work with this option, make sure you filter through debt settlement companies or firms to find the best fit. 

What is Debt Consolidation?

Debt consolidation is a process where you use different forms of financing to pay off other debts and liabilities. Since all debts are combined into a single loan, it often has more favorable terms—a lower interest rate, low payments, and more repayment time.

A debt consolidation loan can be a valuable financial tool. If you have various debts like student loans, credit cards, etc., it is possible to roll them all into one new loan.

With debt consolidation, you can lower your debt repayment stress by reducing the total number of payments you need to make each month. Consolidation puts different types of debts into one account. This way, you’re only making one payment each month instead of trying to manage multiple due dates and payment amounts.

How To Apply For A Debt Consolidation Loan

To get one of these loans, you will need to go through an application process like any other loan. You can increase your chances for approval by following the following steps:

Check Your Credit Score

Your credit score is a rating that lenders and creditors have been using to determine your creditworthiness. It is a number based on your overall history of borrowing money (or using credit) and how quickly you repay it. A credit score ranges from 300 to 850.

Before bad credit loans, you should know that bad credit (a credit score that ranges from 300-629) will not necessarily disqualify you for a consolidation loan; borrowers with higher scores are approved more often than not. If your credit score is bad, you may want to consider taking time to rebuild your credit score before you apply for debt consolidation.

Total Your Accounts

List your current debts (credit cards, store credit cards, payday loans, etc.) and calculate the total debt amount. The total is the amount of money you want for your consolidation loan.

Then, total up the monthly contributions you make towards your debts. Your monthly payments need to fit within your budget. Figure out how much you’re paying per month on your debts, then determine if you need to make any spending adjustments to continue your debt repayments. The new loan should have a lower rate and a monthly payment that fits within your budget.

Shop Around And Compare Loan Options

You can get debt consolidation loans from many lenders and financial institutions. 

Bank loans are the best option for those with high credit scores. Customers with an existing banking relationship are eligible for a better interest rate.

Credit unions are member-only, non-profit organizations that offer services similar to a bank. They often offer lower rates than traditional banks to borrowers with complicated credit histories. A debt consolidation loan from a credit union requires a hard inquiry with your application, which can cause your credit score to dip temporarily.

Online lenders offer a range of services. Many online lenders also let you ‘prequalify’ for a consolidation loan. Additionally, you can compare different rates & terms without impacting your credit score.

When choosing a lender for debt consolidation loans, consider companies that offer direct payment to creditors. After your loan is closed, the lender will send your loan proceeds directly to your creditors without any additional costs – no extra fees are necessary.

Take note of other features that make your decision easier. These might include options like having your payments reported to all major credit bureaus and credit counseling courses.

But above anything else, the loan you choose should be affordable. No unique options or features will beat a loan with a reasonable interest rate and monthly payments you can make.

Advantages of a Consolidation Loan

All told debt consolidation can make life easier by eliminating multiple payments and lowering your overall expenses. Taking out a loan to combine numerous debts might not seem like a wise idea, but it can help you in the long run. By combining all of your debts into a debt consolidation loan, you’ll save money on interest rates and have only one monthly payment to make. 

Plus, having just one loan could improve your credit score by reducing the chances of you making a late payment or missing a payment entirely. And, for those trying to become debt-free, debt consolidation can help you pay off your debt faster. Keep in mind that debt consolidation typically leads to a longer loan term, so it is vital to make a point of paying your debt off as soon as possible.

Disadvantages of a Debt Consolidation Loan

On the other hand, a debt consolidation loan does come with a few cons. Loan providers will charge origination fees, balance transfer fees, closing costs, and annual fees for their services—all of which can add up quickly. Additionally, your new interest rate can be deceiving. 

Even though it may be lower, the life of the loan may cause you to pay more interest than your original loan ultimately. As a borrower, be sure to understand the terms and the actual cost of any debt consolidation loan before accepting it.

What is Debt Settlement?

Debt settlement (also known as debt relief) takes a different approach to debt than consolidation. When you go through debt settlement, you’re asking one or more of your creditors to accept less than what you owe. If you and your creditors reach an agreement, you will pay the settlement amount in a lump sum or a series of installments. 

Creditors are legally bound to accept this arrangement. This process allows the creditor to recoup at least some of the money owed. It also can help the borrower improve their credit and avoid filing for bankruptcy

How Debt Settlement Works

Anyone can ask for a settlement with a creditor, and so, you settle debt on your own. But, most debt settlement success comes with the help of debt settlement companies. A debt settlement company will contact your creditors and act as your representative to negotiate a lower balance. These companies charge a fee for their services, usually some percentage of the money they saved on the debt settlement. 

The debt settlement company may try and negotiate a less hefty amount with your creditor. As they negotiate, some companies require you to make regular deposits into an account under your control but administered by a third party. The money held in this account goes towards the debt settlement. 

The Risks of Debt Settlement

There are some drawbacks to debt settlement that you should be aware of before enlisting the services of a debt settlement company. 

Debt settlement can take time, and there is no guarantee that the process will settle all your debts. After working with a company for as long as a year, it may turn out that your creditors will not agree on a settlement number. Moreover, most creditors won’t even begin negotiating with you until the account becomes past due. The process will continue to cost you money as long as it draws out—either in service fees, required escrow payments, or both. 

Even if you do reach a settlement, your action will not clear your credit report as a typical closed or “paid in full” account and, therefore, will not be as positively impactful. And the action will stay on your credit report for at least seven years. So, even after you go through debt settlement successfully, your debt will remain with you for a while.

As you can see, some of the risks are relatively serious. Debt settlement is not a method that you should try without professional advice. If you want to use debt settlement, make sure you find an experienced and reputable company that follows all the laws and regulations. 

How To Improve Your Debt Management

Debt consolidation and debt settlements are not a fix-all. These options merely simplify payments; they don’t address any underlying financial habits that led to those debts in the first place. Many borrowers who take advantage of debt consolidation or debt settlement find themselves in deeper debt because they didn’t curb their spending and continued to build debt.

As you settle or consolidate your debt, either process creates an excellent opportunity to improve how you handle your debt. There are tons of tactics, tools, and credit counseling services that can assist.  

However, here are three basic steps you can take on your own as soon as possible.

Know How Much You OweCreate a detailed list of all your debts, including total amount, monthly payment, due dates, and interest rates. Use your credit report to confirm your accounts. This provides a complete debt picture.
Pay Your Bills On TimeMissing payments leads to higher interest rates and finance charges.Paying late fees for missed payments is costly.Missing two payments in a row can further increase interest rates and finance   charges.
Create a BudgetStart with a simple budget comparing monthly living expenses to earnings.Identify areas for eliminating wasteful spending and allocate funds toward paying bills.


How does a balance transfer credit card help in consolidating several debts?

A balance transfer credit card allows individuals to transfer balances from other credit cards, consolidating several debts into one card. This can offer a lower interest rate, simplifying debt payments and potentially saving on interest.

What’s the difference between debt relief and debt settlement?

While both aim to reduce the burden of debt, debt relief is a broad term encompassing various strategies, including debt settlement, consolidation, and counseling. Debt settlement specifically involves negotiating with creditors to accept a reduced amount to settle debt.

Can personal loans be used to consolidate debt?

Yes, personal loans are a common method to consolidate debt. They can combine several debts into one loan, often with a fixed interest rate, making debt payments more manageable.

Is it advisable to use a debt settlement agency or negotiate directly with creditors?

A debt settlement agency has experience in negotiating with creditors and might achieve more favorable outcomes. However, individuals can also approach creditors directly. It’s essential to research and understand the pros and cons of each approach.

How does debt consolidation differ from consolidation and debt settlement?

While both are strategies under the debt relief umbrella, debt consolidation focuses on combining multiple debts into one, often with better terms. In contrast, debt settlement aims to negotiate with creditors to reduce the total amount owed.

If I settle a debt for less than what I owe, how does it impact my taxable income?

The amount of debt forgiven in a debt settlement can be considered taxable income. It’s essential to consult with a tax professional to understand the implications.

Why might someone choose a debt settlement program over trying to consolidate debt?

If someone believes they cannot manage the consolidated debt payments or if their debt is too high, they might opt for a debt settlement program. This approach can reduce the total debt amount, but it might have implications for credit scores and taxable income.

Can debt consolidation reduce the total amount I owe?

Debt consolidation reduces multiple debts into one payment, often with better terms. However, it doesn’t typically reduce the principal amount. Instead, it might save on interest or extend the loan term.

Conclusion With CreditNinja

Debt consolidation and debt settlement are strategies consumers use to get out of debt. The main difference between the two is debt consolidation incorporates the debt into one fixed monthly payment. In contrast, debt settlement only takes care of the highest interest rate and leaves the rest of the debt intact.

Both attack your debt differently, but they share one important trait—moving your debt closer to zero. CreditNinja wants to highlight that any debt management action plan can help you get back on track. It will lower the amount of interest you are paying on your debts and make it easier to repay them over time. You can also use either to lower your monthly payments and set a realistic timeline for getting out of debt altogether.

The best choice for you will depend on many factors, but ultimately, either one will positively impact your financial life. 


  1. Average American Debt by Age | CNBC
  2. Which debt management action plan is right for you? | Experian

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