One reduces creditors and the other reduces your debt

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One reduces creditors and the other reduces your debt

Debt settlement and Debt consolidation are two financial strategies that can be used to reduce personal debt loads. However, they work in different ways and are used for different purposes. Debt settlement can be used to reduce the amount of debt you owe, while debt consolidation can be used to reduce the number of creditors. Both strategies can provide secondary benefits, especially debt consolidation.


  • While debt consolidation and debt settlement can help reduce your debt load in a variety of ways, they are not the same thing.
  • While debt settlement can help you reduce your total debt, debt consolidation can be useful in reducing the number of creditors you owe.
  • Multiple loans can be combined into one consolidation loan with one interest rate.
  • You or a credit counselor can negotiate with creditors to lower your debts. Sometimes, this is done in a lump sum settlement.

What is Debt Consolidation?

Consolidating debt is the process of combining multiple debts into one consolidation loan. This loan consolidates all your debts into one monthly payment with one interest rate. Consolidation loans are offered through financial institutions–including banks, credit unions, and online lenders–and all of your debt payments are made to the new lender going forward.

This consolidation can have psychological benefits as it reduces stress associated with managing multiple debt payments every month. A consolidation loan could result in a lower monthly payment or an average interest rate for your debt. The length of your loan repayment term, and/or the fees you pay for it (e.g. application fees), will determine whether or not you are able to save interest over the long-term.

Unsecured or secured debt consolidation loans can be obtained. Secured debt consolidation loans will require that you use at least one asset as collateral. This could be your home, car or retirement account or an insurance policy. If you consolidate debt with a home equity loan, your home would be secured.

What is Debt Settlement?

Consolidating debt allows you to consolidate multiple debts into one loan. However, debt settlement uses a different strategy. When you settle debt you are asking one or more creditors to agree to pay less than the amount owed to your account. You and your creditor can reach an agreement to pay the settlement amount either in one lump sum or over a number of installments.

Debt settlement offers the advantage of allowing you to eliminate your debts and not having to pay the entire balance. If you are in financial crisis and need to file Chapter7 bankruptcy, this may be an option.

However, creditors are not under any obligation to accept or enter into negotiations. You should also remember that settling a matter requires that you have enough cash to pay the agreed upon amounts. A debt consolidation loan might be a better option if you don’t have enough cash to negotiate.

How to negotiate a debt settlement

Although it is difficult to negotiate a debt settlement, you will need to be able to bargain. You can reach out to your creditor to see if they are open to negotiating a settlement if you are behind on any of your debts. This can be done over the phone. However, if you prefer a paper trail, you can send a request in writing.

The creditor has three options: either accept or reject the settlement offer, or make a counteroffer. If your creditor counteroffers, you can then evaluate whether the amount they are asking for is feasible within your budget.

After you have reached an agreement with a creditor on the settlement amount, you can make arrangements to pay the payment. You may be asked to pay a lump sum or multiple installments, depending on which creditor you are working with. You may be asked to send an electronic payment from your bank account or wire transfer. Or you can write a check.

The debt is paid off and the balance is erased. With unsecure debts like credit cards, your account could be closed entirely after settlement. The lender won’t want to give you credit again. This, together with any late payments associated with the account could lead to credit score points being lost.

You can also hire a company to help you negotiate debt settlement. This will most likely require you to pay a fee. For free information about debt negotiation and debt negotiators, you can contact the Federal Trade Commission (FTC) or the National Consumer Law Center.

Debt Consolidation or Debt Settlement: Which Is Better?

Debt consolidation versus debt settlement may be the best option when you are trying to figure out how to manage your debts. One option may be better than the other depending on your financial situation.

If you are looking for a way to reduce your monthly debt payments and make it more manageable for your finances, consolidating your debts into one loan might be a good option. To qualify for the lowest rates on personal loan for debt consolidation, you will need to have good credit.

You might look into debt settlement if you are behind in payments on one or more of your debts, and your creditors threaten to sue you. This could be less costly than filing for bankruptcy.


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