Debt Consolidation vs Debt Settlement: The Differences Explained

There are certain things to know when it comes to your debts. You can click here to check out our comparative guide on debt consolidation vs debt settlement.

The average person in America has over $38,000 in personal debt. That’s excluding home mortgages.

In the past year, credit card debt has increased by 7%. What about in the past five years? Debt has increased by more than 37% if you go back that far.

More and more households struggle to make ends meet beneath the mountain of debt. If you’re one of those people, you might be wondering what the difference is between debt consolidation vs debt settlement. Keep reading to find out.

Difference Between Debt Consolidation vs Debt Settlement

Both debt consolidation and debt settlement can help you reduce your debt load. However, both use different strategies to achieve this end result.

Debt Consolidation

A consolidation settlement (or debt consolidation) rolls multiple loans into a single loan. This can assist you in settling loans faster. It also reduces the confusion of paying multiple types of bills.

To get debt consolidation, you must go through a financial institution like a bank or Alleviate Financial Solutions. When you make your new monthly payment, they go to the new lender.

What does debt consolidation do to your credit score? You might see a slight hit to your credit score at first, but it should recover fast.

Debt Settlement

When you choose to do a debt settlement, you negotiate with all the creditors you owe to get an overall lower amount owed into a lump-sum settlement. Most often, your account must already be delinquent before a creditor will consider a settlement a viable option.

Pros and Cons of Both

The advantages of debt settlement focus on lowering your total debt. When you’ve finished negotiating, you might luck out and only have to pay about half of what you originally owed.

Once you’ve gone the debt settlement route, you’ll also, at last, be free of harassing creditors. You’ll have worked out an arrangement and they will stop phoning you every day demanding their money.

The negatives, however, are hefty for debt settlement.

The impact makes on your credit score can be severe. Those negative hits will sit on your report for the next seven years, too.

It can also take a long time for the debt settlement to be agreed upon. It isn’t unheard of for creditors to take a couple of years to finalize the agreement. Until then, you’ll continue accruing late fees and penalties.

On the other hand, debt consolidation has much to offer with fewer negatives.

You’re able to consolidate multiple bills into a single loan with interest. When you do this, you’re able to save massive amounts of money on a monthly basis because your monthly payment will be lower than the combined bills you were previously paying.

While your credit score will experience an initial dip at the start, once you begin making payments, it will rebound fast. Debt consolidation is even a great way to build your credit score up fast.

If you’re looking into debt consolidation, you may have heard of National Debt Relief vs Freedom Debt Relief. Both are debt relief companies. However, it’s recommended you research several top rated debt consolidation lenders before you decide.

Be Debt Free Faster

If you’re one of many Americans struggling to be free of debt, there are many solutions you can look into to help you be rid of it sooner. We hope this article helped explain the differences between debt consolidation vs debt settlement and gave you ideas on how to address your debt moving forward.

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