Debt consolidation versus debt settlement – which is better?

53513938 - businesswoman with mask swims between the sheetsDebt consolidation and debt settlement are both financial strategies that share a common goal – to help consumers resolve their credit card debt – but they achieve it through different routes. At the most basic level, debt consolidation is useful for reducing your total number of creditors. On the other hand, debt settlement helps to reduce your total amount owed.

However, determining which is right for you is dependent on several factors. This post explores how they both work and when they’re appropriate.

Debt Consolidation

In debt consolidation, all of your multiple lines of credits are consolidated into a single payment. A consolidation loan is obtained from a financial institution to settle all your multiple debts. Then, you’ll have only one monthly payment (at a specific interest rate) to pay to your new lender.

Debt consolidation can be achieved through four major means, which include:

1) Debt management plan (DMP)

2) Balance transfer on credit cards

3) Personal loans

4) Home equity loan or line of credit

Debt Consolidation: Pros & Cons

According to the 2019 Experian Consumer Credit Review, the average American household has 4 credit cards and carries $6,194 in credit card debt. When you include cable, rent, cell phone, utilities, and so on, that’s a lot to deal with on a monthly basis.

Once you fall behind on one credit card, the uphill struggle begins. But why wait until you get to that point. Once you start to notice that you cannot afford to make payments above your monthly minimum payment, then it might be the right time to consider debt consolidation.


  • It helps to simplify your payment process. You only have one creditor, one deadline, one payment, and one interest rate to manage.
  • Once you start to fall behind in your card payment, card companies can raise your interest rate to 20% – 30% range, even higher. On the other hand, debt consolidation loans usually cost between 8 to 15% in interest rate.
  • You can easily improve your credit score provided you stick to your payment plan for the new loan.


  • Your debt is neither reduced nor forgiven, as you still have to pay the full amount you owe.
  • If your credit score is low, a debt consolidation loan will come at a high-interest rate (comparable to that of your current credit card rate).
  • Debt consolidation is a long term solution. Be prepared to spend between 2 to 5 years before you complete your payment process under debt consolidation.

Debt Settlement

Debt settlement does not seek to replace existing debts with a single new loan. Instead, it involves a series of negotiations between you (or your credit counselor) and your creditors. The goal is to get your creditors to agree that you pay less than the amount you currently owe, usually as a lump-sum payment.

For instance, if you owe $10,000, you might offer to pay $6,000 to your creditors as a lump-sum. But why might they agree to a reduced amount? Because if you declare bankruptcy, your unsecured debts will be entirely wiped off and they’ll receive nothing. That’s why debt settlement companies will advise you to stop making monthly payments during the negotiation process, so it can nudge your creditors into agreeing to a settlement.

Debt Settlement: Pros and Cons


  • You get to reduce the amount you owe by a significant amount.
  • Since you’re paying it as a lump sum, you get instant relief for your debts in less time.
  • It is a good strategy to avoid bankruptcy, which will have a more devastating impact on your credit score.


  • The creditors are under no obligation to agree to a settlement.
  • Since you stop making payments during the negotiation process, you will rake up additional late fees, increasing your debt if the creditor doesn’t settle.
  • Your credit score will be severely impacted because you stopped making payments.
  • It will remain in your credit report for 7 years, making it more difficult to secure new loans.
  • Debt settlement companies charge a fee for their services.
  • You might have to pay tax on whatever amount was forgiven due to the settlement.

Which Should I Choose?

If you’re having a hard time keeping track of your multiple debts, but you’re making enough to make monthly payments, then debt consolidation might be better for you. By consolidating your debt strategically, you can even save in the amount you’ll pay in interest over the long run. Moreover, it gives you peace of mind as you only need to keep track of one payment.

If you’re in a dire financial situation, where you cannot meet up to your monthly obligations, your debt problem gets worse rapidly. If it continues, you might have to file for bankruptcy. Debt settlement can help prevent that from happening. By paying a fraction of what you owe as a lump-sum, you get to resolve your debt problem once and for all. But remember that lenders are under no obligation to settle.

Contact us today for more details.

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