4 Difference Between Debt Settlement And Debt Consolidation

Debt settlement or Debt consolidation, which option is better and makes more sense?

This is the most frequently asked question by many individuals with debts and looking for ways to get out of them. 

Both Debt settlement and Debt consolidation are financial strategies used to manage your debt load, but they function differently and are used to resolve different issues. 

In general, debt settlement reduces the total amount of debt owed, while debt consolidation reduces the number of lenders you owe.

In this article, we’ll be exploring the difference between Debt Settlement and Debt consolidation and how to decide which one you should go with depending on your financial situation.

What Is The Difference Between Debt Settlement And Debt Consolidation?

Key Takeaways

  • Consolidating debt is one of the best ways to get rid of the stress of juggling multiple debt payments each month.
  • You need to have a good credit score to get your debt consolidated.
  • Debt settlement is considered a risky option, and most financial experts recommend it only as a last resort.

What is Debt Consolidation? 

Debt Consolidation is a form of debt relief that replaces your old debts with a new loan.

It typically combines multiple debts into a new consolidation loan to make it easy to pay.

This loan only has one single monthly payment with a lower interest rate. 

Consolidation loans are given through banks, credit unions, and online lenders, and you make all your debt payments to the new creditor.

Consolidating debt is one of the best ways to get rid of the stress of juggling multiple debt payments each month.

Read: Progressive Debt Relief Review

What is Debt Settlement? 

Debt Settlement is another effective debt relief method, but it uses an entirely different approach.

Think of it as a form of debt forgiveness where your creditors agree to accept a lesser amount of what you owe. 

It typically involves going delinquent on your bills and negotiating with the creditors for a smaller percentage of your owe.

If you successfully reach an agreement with your creditor, you can pay the settlement amount in a lump sum or installments to satisfy the debt.

Key Differences between Debt Settlement or Debt Consolidation

ComparisonDebt ConsolidationDebt Settlement
How Does it Work? It focuses on reducing the number of creditors by combining your debts into one debt with one interest rate. It focuses on reducing the total amount of debt to what is owed.  
What Does it Cost?The interest rates of consolidation loans vary from lender to lender. You may have to pay a loan origination fee. It costs nothing if you do it yourself, but debt settlement companies usually charge a fee of 15% to 25% of the total debt amount.
Impact on Credit ScoreDebt consolidation can cause a slight dip in your credit scores, but it will help you improve your credit scores over time by reducing your credit utilization ratio. Debt settlement can significantly affect your credit scores because it involves going into delinquency on your debts.

Pros and Cons of Debt Consolidation


  • It helps you reduce the number of creditors by combining your debts into one new loan. 
  • You’ll be paying the lowest interest rates, which means you will pay your debts faster. 
  • Combining multiple debts in one account helps simplify paying your bills. 
  • It helps you build a solid financial position by improving your credit scores by reducing your utilization ratio. 


  • It does not reduce or eliminate your original debt, and you can only reorganize the payment plan with different terms. 
  • To get a debt consolidation loan, you must have a good credit score
  • If you have a poor credit score, you will likely deny the loan or get higher interest rates. 
  • It is time-consuming and may take 2-5 years to make you debt-free. 

Pros and Cons of Debt Settlement 


  • Help people with overwhelming debts pay less on the amount owed and get relief from the unbearable debt faster in 2-4 years. 
  • Help people prevent their debt from being sent to collections or sold to a debt collection agency. 
  • It can help you avoid bankruptcy which can stay on your credit report for a lifetime. 
  • Help people avoid being sued for their credit card debt or going through a lengthy contentious proceeding. 


  • Debt settlement companies usually charge hefty fees, generally a percentage of the amount you owe. 
  • Debt settlement will negatively impact your finances and affect your credit scores for your future employment opportunities, loan terms, and credit availability. 
  • Lenders may refuse to accept the settlement offers made by the debt settlement companies. 
  • Even if your creditor agrees to a reduced payment, you’ll have to pay taxes on the reduced debt. 
  • Debt settlement companies often encourage people to stop paying their creditors until they negotiate the terms. Those late fees are added to the debt you already owed, making things worse. 

Debt Settlement Vs. Debt Consolidation: Which one is a Better Choice? 

Both options are great for managing debt but have their unique challenges and drawbacks, and both options can be right or wrong choices depending on the specifics of your financial situation. 

For instance, if you need a solution to make your monthly payments more manageable, Debt consolidation would make sense to you.

It offers more control and visibility over your debt and gives you more determination to pay off the debt. 

Why you might choose it: Debt Consolidation

  • To reduce the number of debt payments, you are juggling
  • To get a lower interest rate
  • Want to improve your credit score 

Debt settlement is considered a risky option, and most financial experts recommend it only as a last resort.

The risk factor is high because you can withhold loan payments that can damage your credit scores for up to 10 years.

Why you might choose it: Debt Settlement

  • If your account is already long delinquent and your creditor threatens to file a lawsuit.  
  • Your credit score is already damaged, and you have so little to lose. 
  • If your debt has spiraled to a point where you have exhausted all options and still cannot find a way out. 
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