Debt settlement and debt consolidation are among the top debt-reduction options for individuals who have more debt than they can handle. While both tracks can help you get out of debt, their approaches are very different.
Debt settlement reduces your total debt amount, and debt consolidation reduces the number of creditors you owe. It may not be obvious which one is right for you. Study your options and, if needed, enlist the help of a debt adviser.
People who opt for debt settlement typically choose to seek the aid of a settlement firm. Credit counselors at settlement firms are well-versed in the settlement process and can improve the likelihood of it being successful.
During the settlement process, you’ll save up a specific portion of your total debt, as determined by your counselor. Once you hit that amount, the counselor will reach out to your creditor and negotiate on your behalf.
The end goal of this is to convince your creditor to forgive a substantial portion of your debt, potentially saving you thousands of dollars. In return, your creditor receives a lump sum, funded by your accumulated savings.
In debt consolidation, you’ll combine some or all of your loans. You’ll take out a new, larger loan, often in the form of a home equity loan or other secured debt. Using the money from that loan, you’ll pay down all your other loans.
The end result will be a single loan and a simpler repayment schedule. A consolidated loan typically also comes with lower interest rates and better repayment terms.
Both options can save you money. Settlement will cut your principal, while consolidation is likely to reduce your interest payments.
Neither option will eliminate your debt without your continued efforts. With either option, you must still work toward making a manageable budget and keeping your finances in check.
While debt settlement reduces your loan principal, debt consolidation reduces your total number of loans. In other words, if you go through debt settlement, you’ll still owe money to the same lenders but you’ll owe less. If you go through debt consolidation, you’ll owe a single, different lender, and your total debt amount won’t change.
In debt settlement, your creditors are directly involved; they can choose to accept or decline your settlement offers. Consolidation, on the other hand, does not require any consent from your creditors. This means consolidation often comes with less hassle.
Most consolidated loans keep you in debt longer than settled loans. Once loans are settled, they are considered paid in full. But after consolidation, you must continue to make monthly payments toward the debt, and new loan terms may keep you in debt for longer than you anticipated.
Consolidation may also require you to use collateral. A consolidated loan may achieve its lower interest rates by being tied to property such as your home or car. This makes a consolidated loan riskier; if you fail to make regular payments, you are in jeopardy of losing whatever property you used as collateral.
Either option can help you reduce your debts and eventually become debt-free. A credit counselor can help you choose which one is right for you.