Debt Settlement vs. Debt Consolidation: Which Is Right for You?
- Debt settlement and debt consolidation are debt relief tactics that could make your debt more manageable.
- Debt consolidation works by changing how you repay your debt, while debt settlement reduces the amount that you owe.
- Deciding which is better means comparing what each would accomplish in your particular situation.
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Are you having trouble keeping up with your debts? It’s nothing unusual these days. With millions of Americans in the same boat, you’re not alone
The way to break free from debt struggles is to take action. We’ll help you understand what debt relief strategies like debt consolidation and debt settlement could do for you.
What is debt consolidation?
Debt consolidation means replacing multiple debts with one new debt. Basically, you borrow money to combine and pay off existing debts.
One benefit of this strategy is that your payments are simplified. It’s easier to keep track of one monthly payment than multiple payments to different creditors.
Beyond that, debt consolidation could offer these benefits:
Reduce your monthly payments, relieving strain on your budget
Reduce the total amount of interest you pay (unless you take longer to pay off the loan)
Lower your credit utilization ratio if you use a new installment loan to consolidate credit card debt
Potentially increase your credit score by reducing your credit card debt
Get a firm payoff date for the debt you consolidate
Move variable-rate debt to a fixed interest rate
You don’t have to get all of these benefits to make consolidating worthwhile.
Debt consolidation depends on your credit still being good enough for you to qualify for the new loan. It’s not a realistic option if you’ve already fallen behind on your payments.
What is debt settlement?
Debt settlement involves negotiating with creditors to reduce the amount you owe. You can try doing this yourself or hire a debt settlement professional to do it for you.
When you can’t pay your debts, the worst thing to do is try to ignore them. This will result in you being hounded by bill collectors while you cause damage to your credit score by missing payments. As interest and fees accumulate, your debts will grow.
The better way is to contact your creditors and see if you can work something out. While creditors prefer to be paid all that they’re owed, they don’t want to waste time trying to collect debts that can’t possibly be paid.
If you can demonstrate to a creditor that there’s no way you can pay your debt in full, they might agree to accept a lesser amount. As the saying goes, half a loaf is better than none.
It’s true that having debt canceled could show up on your credit report (when a debt is reported as “settled,” that’s less favorable than “paid as agreed). But once you get on firm financial footing, a strong credit profile comes more naturally. You’ll be in a great position to build your credit score up once you get rid of your crushing debt and can afford to make all your payments on time every month.
When should you consider debt consolidation?
Whenever you have debt, it’s smart to be on the lookout for options to make it cheaper and easier to manage. You could consider debt consolidation if you qualify for a new loan that has better terms than your existing debt and you have a plan to avoid running other debts back up. For instance, if your debt was caused by overspending, be proactive about shutting down or freezing your credit cards, especially while you’re paying down your consolidation loan. On the other hand, if your debt was caused by a medical emergency, you might not be at risk of overspending.
Debt consolidation makes the most sense when:
You have higher-interest debts, like credit card, and can qualify for a new lower-interest loan.
You have a plan for managing new debt.
You can afford your debts but want to streamline them.
When should you consider debt settlement?
Debt settlement can be a game changer when you can’t see any realistic way of paying your debts off in full. Consider debt settlement if you’re experiencing a financial hardship that could make it difficult or impossible to fully repay your debts.
Maybe you’ve tried cutting unnecessary expenses but still can’t make your money stretch enough for your debt payments. Perhaps you’ve considered debt consolidation but found that it wouldn’t lower your payments enough or you wouldn’t be able to qualify for the loan that would help you.
At that point, debt settlement may be the best way to break free from not being able to pay your bills month after month.
Debt settlement makes the most sense when:
You’ve already considered other solutions, like tighter budgeting or debt consolidation.
You have a financial hardship that leaves you no realistic way of keeping up with your current payments.
You’ve already fallen behind.
Debt consolidation and debt settlement comparison
Think of debt consolidation and debt settlement as different tools for different situations. Which strategy is better for you depends on your needs and circumstances.
To help you decide, the following table summarizes some of the key differences between debt consolidation and debt settlement:
| Debt consolidation | Debt settlement |
|---|---|
| May reduce interest costs if you can find a lower-interest rate loan. | Reduces total costs by lowering the amount of debt you owe |
| Could reduce your total monthly payment by lowering interest or lengthening repayment term | Pay what you can afford each month until you’ve resolved all of your debts |
| Does not reduce the amount of debt you owe | Reduces the amount of debt you owe |
| Depends on having good enough credit to qualify for a new loan | No minimum credit score |
| Repayment is typically 2-15 years | Often takes 2-4 years |
Before you make a decision, you should research how debt consolidation or debt settlement will change your situation. Find the best terms possible, and then see what that will look like in terms of monthly payments, total cost, and impact on your credit.
Once you know these amounts, you’ll be in a position to decide which of these tactics will leave you better off than you are now.
Insights into debt relief demographics
We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during June 2024. The data provides insights about key characteristics of debt relief seekers.
FICO scores and enrolled debt
Curious about the credit scores of those in debt relief? In June 2024, the average FICO score for people enrolling in a debt settlement program was 583, with an average enrolled debt of $24,376. For different age groups, the FICO scores varied. For instance, those aged 51-65 had an average FICO score of 587 and an enrolled debt of $25,386. The 18-25 age group had an average FICO score of 573 and an enrolled debt of $21,487. No matter your age or debt level, it's reassuring to know you're not alone. Taking the step to seek help can lead you towards a brighter financial future.
Tackle Financial Challenges
Don’t let debt overwhelm you. Learn more about debt relief options. They can help you tackle your financial challenges. This is true whether you have high credit card balances or many tradelines. Start your path to recovery with the first step.
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