Debt Consolidation Vs Debt Settlement

Debt consolidation and debt settlement are both taken to be financial strategies for enhancing personal debt load, however they are pretty different in how they resolve varied issues. In addition, debt settlement lowers the overall amount of debt owed, whereas debt consolidation lowers the overall number of creditors a person owes. Learn about the advantages and disadvantages of each strategy.

Key Takeaways

• Debt consolidation and debt settlement both assist to lower the debt load however in numerous ways.
• Debt settlement reduces the total debt owed, however debt consolidation also lowers the total number of creditors that a person owes.
• With debt consolidation, multiple loans are all easily rolled into a novel consolidation loan that has a single monthly rate of interest.
• With debt settlement, either a person or a credit counselor negotiates with the creditors so that they can pay a readers amount than what they personally owe.

What Is Debt Consolidation?

Debt consolidation is a kind of process in which they combine multiple debts into a single consolidation loan. This is understood as a single loan that rolls all of the prior debts into one loan, resulting in a single monthly payment at one interest rate.

Debt consolidation loans are offered through banks, credit unions, as well as the online lenders—along with the debt payments are also made to the novel lender going ahead.

Consolidating debt in such a way can easily relieve the stress of having to juggle multiple debt payments every month. A debt consolidation loan may possibly result in a reduced overall monthly payment or a reduced average interest rate on the debt. Whether a person is able to save money on interest over time may depend on the length of the loan repayment term and/or whether one must pay any fees for the loan, for instance application or origination fees. 

A debt consolidation loan may be secured or unsecured. Secured debt consolidation loans must require one or more assets such as collateral, for example the home, car, retirement account, or insurance policy. For instance, if a person takes out a home equity loan to consolidate debt, then the home would secure the loan.

Debt consolidation could assist to enhance the credit score if one wants to reduce credit utilization ratio, however it’s significant to monitor the credit reports and scores for any possibly negative impacts.

What Is Debt Settlement?

Debt settlement uses a very different strategy. When a person settles debt, one would effectively ask one or more of the creditors to accept less than what they owe—known as a discounted payoff(DPO). If a person and their creditor(s) reach an agreement, then one would pay the settlement amount in a lump sum or a series of installments.

The benefit of debt settlement is that they can eliminate debts without having to pay the balance in complete amounts. This may be an attractive alternative to bankruptcy, even though it will also have a damaging effect on the credit history.

Make sure to keep in mind that creditors are already taken to be under no obligation to enter negotiations or accept the offer. In addition, providing a settlement needs to have capital on hand to pay agreed-upon amounts. If a person usually doesn’t have the capital to negotiate with, then in order to seek a debt consolidation loan may be the improved option.

Typically, creditors will also consider debt settlement for accounts that are predominantly past due. Henceforth, if one would still current on the balances, then this may not be an option.